Money Management | Vol. 33 No 5 | April 11, 2019

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

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Vol. 33 No 5 | April 11, 2019

TAX STRATEGIES

Managing tax time during a Federal election

23

INFOCUS

Reconciling retirement realities with great expectations

WEALTH MANAGEMENT

15

FE INVESTMENT CENTRE

Positive returns in volatile markets?

Absolutely

Viridian promises new license for migrating BT planners

BY MIKE TAYLOR

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How the banks kept the sweetest morsels WITH Westpac joining the tide of banks leaving wealth management, announcing late last month that Viridian would be buying its face-to-face advice business, what the banks are choosing to keep paints just as important a picture as what they’re exiting.

Westpac kept what it valued most – its private wealth, platforms and investments and superannuation businesses – while drawing a line under the sector of wealth management that was proving most costly both through regulation and from acknowledged and potential losses.

What’s more, stocks in Viridian are held by, amongst others, several former Westpac or BT staffers and the bank has maintained an ongoing commercial relationship with the Melbourne-based firm.

This mentality was also evident in NAB’s announcement last year of its intended exit from wealth management where it kept its JB Were and nabtrade arms. The difference, of course, is that NAB is yet to find a buyer for MLC. NAB also announced in February that its exit from MLC would be delayed, along with the Commonwealth Bank announcing similar stalling on its plans to exit Colonial First State, Count Financial, Financial Wisdom and Aussie Home Loans.

This makes the likelihood of them leaving these parts of their wealth management offerings before 2021 unlikely at best, with much depending on the prevailing political, regulatory and market landscapes.

It’s the final member of the Big Four who seems to have got the timing best for their tactical exit from the less appealing parts of its wealth management business, with ANZ beating the crowd in exiting core elements of its wealth and insurance arms nearly two years ahead of its competitors.

While the sale of the OnePath pensions and investments business has hit some roadblocks, the sale of both Westpac’s advice business and Zurich’s acquisition of its insurance arm are all but complete.

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Full feature on page 26

19

VIRIDIAN, the company which has acquired the Westpac and BT financial advice businesses, is seeking to lure advisers from the aligned Securitor and Magnitude dealer groups with “the opportunity to keep the BTGL community together in an increasingly fractured industry”.

However, it also declared it would be seeking a new Australian Financial Services License (AFSL) to leave legacy issues behind and that the new licensee would be independently led and have an arms-length relationship with Viridian Financial Group.

Money Management was provided a copy of a document being used by Viridian as part of its approach to Securitor and Magnitude advisers which

revealed a company which was offering participation in an ownership structure without any of the legacy issues attaching to the old licensees.

It stated that Viridian would apply for a new AFSL and that firms joining the new license would not be subject to “the same legacy current AFSLs have”.

“Firms joining the AFSL have a chance to help shape its future in a design and community sense,” the Viridian document said. “Staff joining the AFSL have a chance to look forward and engage in a future not bogged down by the past built in a post-Royal Commission world with systems and processes designed to support a post RC advice process.”

The document also promised a Continued on page 3

Kelaher exits IOOF IOOF managing director, Chris Kelaher is to leave the company.

IOOF announced the decision to the Australian Securities Exchange, stating that Allan Griffiths had been elected independent non-executive chairman effectively immediately.

The announcement said Kelaher had left the company by mutual agreement.

His departure follows action initiated by the Australian Prudential Regulation Authority (APRA) out of the Royal Commission which saw Kelaher and IOOF chairman, George Venardos stand aside pending the outcome of court action.

Renato Mota will continue as acting chief executive following Kelaher’s departure with a further announcement to be made regarding succession planning.

Kelaher is on leave but would formally depart the company on 2 July and will receive a payment of $1,273,378 in lieu of his contracContinued on page 3

4/04/2019 2:21:17 PM

2 | Money Management April 11, 2019

Editorial

mike.taylor@moneymanagement.com.au

MEMO ASIC: IT AIN’T ILLEGAL TO UNDERPERFORM

FE Money Management Pty Ltd Level 10 4 Martin Place, Sydney, 2000 Managing Director: Mika-John Southworth Tel: 0455 553 775 mika-john.southworth@moneymanagement.com.au

Despite the populist chest-beating rhetoric from some of the Australian Securities and Investments Commission’s most senior executives, superannuation funds don’t breach the law when they under-perform.

MEMO: AUSTRALIAN SECURITIES and Investments Commission (ASIC) deputy chair and erstwhile deputy chair of the Productivity Commission (PC), Karen Chester.

It is not actually a breach of the law for a superannuation fund to under-perform over a one, three or five-year period. Bloody annoying and disappointing for members, of course, but not illegal.

And it is drawing an extremely long legal bow to suggest, as you apparently did at a recent Sydney forum, that just because a fund has under-performed, the trustees have failed to act “efficiently, honestly and fairly”. By what measure? According to what benchmark?

Nor, Ms Chester, is it unusual for a superannuation fund to be an investment performance cellardweller and then become part of the Top-10 performing funds. It is, as you should know, a product of asset allocations and how well they fit the prevailing market cycle.

If you want proof of this Ms Chester, perhaps you ought to look at the performance record of

MTAA Super which, controversially, went from the top of the performance tables before the Global Financial Crisis only to fight its way back up the league tables in more recent times.

Any examination of the Top 10 defaults model you proposed as PC deputy chair would tell you that the list would change depending on allocations and the state of the market – something which keeps investment analysts busy and off the streets.

Thus, it is all very well for ASIC to keep promoting its chest-beating “why not litigate” approach, but to mount a prosecution you must first observe a breach of the law and that is going to prove challenging where no such specific law exists and, frankly, is most unlikely to exist.

What is more, Ms Chester, just as a matter of convention, regulators do not make policy or draft legislation – that it the prerogative of the Government of the day via the Parliament.

And just by the way, the approach of the Australian Prudential Regulation Authority (APRA) to dealing with

under-performing funds and putting members first is already proving far more measured and effective in terms of ensuring underperforming funds either merge in the best interests of their members or exit the industry.

Indeed, it might be noted that the approach of APRA in dealing with under-performing funds is most unlikely to take up the time of the courts or to weigh unduly on taxpayers.

Few people in the superannuation or broader financial services industry would argue with the need for persistently under-performing superannuation funds to exit the industry, but to suggest that “close to 100” will be compelled to head for the exit in the next five years needs to be backed up by facts – By what measure?

According to what benchmark?

Frankly, the time for post-Royal Commission chest-beating by our financial services regulators has passed. ASIC and APRA need to get on with doing their jobs.

Mike Taylor Managing Editor

Managing Editor/Editorial Director: Mike Taylor Tel: 0438 789 214 mike.taylor@moneymanagement.com.au Associate Editor - Research: Oksana Patron Tel: 0439 137 814 oksana.patron@moneymanagement.com.au Features Journalist: Hannah Wootton Tel: 0438 957 266 hannah.wootton@moneymanagement.com.au Journalist: Anastasia Santoreneos Tel: 0438 836 560 anastasia.santoreneos@moneymanagement.com.au Journalist: Chris Dastoor Tel: 0439 076 518 chris.dastoor@moneymanagement.com.au Events Executive: Candace Qi Tel: 0439 355 561 candace.qi@financialexpress.net ADVERTISING Sales Director: Craig Pecar Tel: 0438 905 121 craig.pecar@moneymanagement.com.au Account Manager: Ben Lloyd Tel: 0438 941 577 ben.lloyd@moneymanagement.com.au Account Manager: Amy Barnett Tel: 0438 879 685 amy.barnett@financialexpress.net PRODUCTION Graphic Design: Henry Blazhevskyi

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4/04/2019 10:21:28 AM

April 11, 2019 Money Management | 3

News

FPA urges ASIC to act on fee comparability

BY MIKE TAYLOR

CONSUMERS need more rather than less information on fees and costs when it comes to selecting superannuation products and will be well-served by receiving the assistance of a financial planner, according to the Financial Planning Association (FPA).

The FPA used a submission responding to an Australian Securities and Investments Commission (ASIC) discussion paper on disclosing fees and costs in product disclosure statements (PDSs) to argue that it should not be assumed that consumers will be overwhelmed by too much information.

The FPA submission argued that much of the current problem encountered by both consumers and advisers was the inconsistent approach of financial product manufacturers. “… the biggest challenge of advisers at present is the inconsistent approach by which product providers are disclosing their fees which inhibits financial advisers’ ability to clearly compare costs of financial products,” it said.

The FPA submission noted that, for this reason, the ASIC consultation and review “is the right step to rectifying this problem”.

“However, it remains incumbent on ASIC to ensure product manufacturers always disclose fees and costs in a clear and consistent manner,” the submission said.

Industry funds want relaxation of advice rules INDUSTRY superannuation funds are better positioned than most to provide low cost financial advice to members in a post-Royal Commission world, according to industry funds groups the Australian Institute of Superannuation Trustees (AIST) and Industry Funds Services (IFS).

IFS chief executive, Cath Bowtell pointed to a likely softening of “the rules that hamstring low-cost simple advice”.

Speaking following a Melbourne symposium on advice in superannuation, Bowtell also pointed to the likelihood that a price would be paid by vertically-integrated groups.

She said that while vertical integration of financial products remained lawful, the separation of product and advice was starting to underpin advice discussions that retail superannuation funds were having.

“Financial advice provided through profit-to-member superannuation funds has always been first and foremost a service, not a distribution channel,” Bowtell said. “As the market changes, and this becomes the norm in financial advice, the rules that

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hamstring the provision of low-cost simple advice could be relaxed.”

Further, she said the non-conflicted governance model of profit -to-member funds meant they were in a strong position to provide quality, low-cost advice to members.

“Profit-to-member superannuation trustees put members’ interests first and this extends to the financial advice their funds provide,” Bowtell said.

AIST chief executive, Eva Scheerlinck said the Royal Commission had proved yet again that there were problems with conflicted financial advisors but demand for quality financial advice was increasing.

“We know that the number of people who need advice is growing and there is a demand from members for advice on a host of financial matters” Scheerlinck said, suggesting this included advice on account consolidation, advice to spouses and advice on Centerlink entitlements.

“The time is ripe for the legal framework around advice – and how advice is described – to change,” Scheerlinck said.

However, the FPA argued that it would be to assume that consumers needed cut-down information on superannuation such as a single illustrative account balance figure.

“The FPA believe overtime, specific changes such as banning of exit fees, increased financial literacy, and technological innovation that reduce barriers to searching and switching, are fundamental reasons why consumers may increasingly rely on disclosure data,” it said.

“The changes to disclosure of fees and costs should consider this future landscape of more engaged superannuation users. Hence, the FPA is concerned the use of a single figure $50,000 in a ‘Cost of Product’ template will not adequately represent future users of superannuation.”

“Therefore, despite concerns that additional information may clutter product disclosure statement, we believe additional comparative figures will play a vital role in driving product comparability and competition,” the FPA submission said.

Viridian promises new license for migrating BT planners Continued from page 1 smooth transition from BT to the new licensee with payments continuing “as per current arrangements with BT”.

The document also suggested the new licensee would be highly selective and would initially be limited to the BTGL network with rigorous review processes being

applied to any recruitment outside of the BTGL network.

Where fees were concerned, the Viridian document outlined a practice fee of $48,000 a year with $22,000 a year for the first two authorised representatives (ARs) and then $15,000 a year for each subsequent AR.

Kelaher exits IOOF Continued from page 1 tual notice period along with accrued leave entitelements.

The announcement said Kelaher’s unvested performance right would lapse as a result of of his cessation of employment and his deferred shares would remain subject to ‘look-back’.

Kelaher said it had been a privilege to serve IOOF and he was proud of what he had achieved but it was time for IOOF to move forward under new leadership.

4/04/2019 2:36:56 PM

4 | Money Management April 11, 2019

Budget news

Positive changes for SMSF sector in Budget Govt will pay

BY OKSANA PATRON

THE SMSF Association has welcomed the Government’s proposed changes regarding calculating exempt current pension income (ECPI) and increasing the age where the work test for making contributions to superannuation applies.

The Association’s chief executive, John Maroney, said that streamlining administrative requirements to calculate ECPI was a decision the Association advocated in its budget submission as a way to reduce red tape.

Changes were expected to be made to allow superannuation fund trustees with interests in both the accumulation and retirement phases during an income year to choose their preferred method of

calculating ECPI. “Currently, the ATO requires them to use both the proportionate method and segregated method for relevant parts of an income year, and this can be unnecessarily complex. This change allows prior industry practice of using the proportionate method and calculating ECPI through an actuarial certificate to begin again,” Maroney said.

“The Government will also remove the requirement for superannuation funds to obtain an actuarial certificate when calculating ECPI

using the proportionate method where all members of the fund are fully in the retirement phase for the entire income year.”

From 1 July 2020, the Government would increase the work test age to 67 to be aligned with the pension age which was another positive change, according to the Association.

According to Maroney, the Government’s decision to leave superannuation alone in this budget would be welcomed by the selfmanaged superannuation fund (SMSF) sector.

“Many SMSF trustees and their advisers are still experiencing the compliance impacts of the 2016 Budget changes that began on 1 July 2017, so the fact there are no more major changes in the pipeline is extremely positive,” he said.

Few Budget surprises in financial services

BY MIKE TAYLOR

BOTH of the major superannuation industry organisations – the Association of Superannuation Funds of Australia (ASFA) and the Australian Institute of Superannuation Trustees (AIST) – welcomed the changes announced by Frydenberg and confirmed in the budget papers.

However the two organisations were more pleased by what the Government did not do, than what it actually announced.

For its part the Financial Services Council (FSC) welcomed much of the Budget content but expressed disappointment that the Government had failed to reform non-resident withholding tax for managed funds in the Asia Region Funds Passport.

“This means Australia will remain uncompetitive in our region, and Australia will not be competing with Asian funds on a level playing field,” the FSC said. “The withholding tax on managed funds raises little money, but harms our competitiveness within Asia, putting Australia’s fund managers at a major competitive disadvantage in the region.”

ASFA chief executive, Dr Martin Fahy described the Budget as bringing stability to superannuation and enhancing confidence in the retirement funding system.

He said the Budget introduced a number of positive superannuation measures. These included: • Greater flexibility in contribution rules for superannuation fund members aged 65 and over;

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• Permanent tax relief for merging superannuation funds; • Increased funding for the ATO to ensure on-time payment of superannuation liabilities by larger businesses and high wealth individuals; • Funding for the Fair Work Ombudsman to address sham contracting arrangements designed to avoid payment of statutory obligations such as the SG; and • Delay in the start of new opt-in arrangements for insurance within superannuation from 1 July 2019 to 1 October 2019, which will allow funds more time to engage with fund members who are affected.

Fahy said that changes made to superannuation tax settings in the Government’s 2016 Budget in particular, had made the superannuation system sustainable and equitable.

“The Government has today taken the opportunity to reaffirm their commitment to retirees by leaving the system alone,” he said.

AIST chief executive, Eva Scheerlinck said the changes to the rules for voluntary super contributions in the 2019 Federal Budget were good news for older members who could afford to make additional contributions to their superannuation savings, but would have minimal impact on the retirement outcomes of most Australians.

“The vast majority of members of profit-tomember superannuation funds will not benefit from these changes,” she said. “Most ordinary working Australians cannot afford to make extra contributions and can only dream of having the money to pour an extra $300,000 into their super fund in a single year.”

unpaid FOS determinations THE Government delivered few financial services surprises in the Federal Budget, but did announce that it would be providing $30.7 million to pay compensation to consumers who have been victims of unpaid Financial Ombudsman Service (FOS) determinations.

The Government had committed to the introduction of an industry funded compensation scheme of last resort, but the Treasurer, Josh Frydenberg, went further in the Budget with respect to the Commonwealth funding the unpaid determinations.

“The Government is committed to ensuring consumers and small businesses affected by misconduct have access to redress,” the Budget documents said.

“The Government established the Australian Financial Complaints Authority (AFCA) last November: a one‑stop shop for free, fast and binding dispute resolution. The Government will provide $2.8 million for AFCA to establish a historical redress scheme for eligible financial complaints dating back to 1 January 2008 (the timeframe adopted by the Royal Commission).”

“The Government will provide $30.7 million to pay compensation owed to consumers and small businesses from legacy unpaid external dispute resolution determinations.”

It said it had committed to an industry‑funded compensation scheme of last resort and would provide $2.1 million to Treasury and $0.5 million to AFCA to establish the scheme.

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6 | Money Management April 11, 2019

News

Emulate super on legacy products says FSC

BY MIKE TAYLOR

THE Federal Government should use the superannuation industry legacy product rationalisation regime as a model for the remainder of the financial services industry, according to the Financial Services Council (FSC).

The FSC used its pre-Budget submission to plead for Government action to clear the way for financial services product rationalisation and has cited the current rationalisation regime in superannuation as having provided significant benefits to consumers.

It pointed out that the current super rationalisation regime permits a consumer to be transferred to another product, or have their existing product changed, broadly if the Trustee determined it to be in the interests of those consumers.

“Our view is that the regulatory aspects of the rationalisation regime for other product

types should be modelled on the regime for super, with the exception that the relevant test be undertaken at the collective consumer level

in all cases,” the FSC submission said.

Elsewhere in its submission, the FSC said it had surveyed members to develop conservative estimates of the benefits that an effective product rationalisation regime would deliver.

It stated: • 38 individual IT systems could be closed, of 79 legacy IT systems across the sample; • 286 life insurance products and 77 managed investment schemes could be closed; and • $22.6 billion in funds under management could be transferred to contemporary products.

“FSC members forecast that through these changes they could reduce costs to consumers by $94 million over the near term through a staged rationalisation program,” the submission said.

“However, the current mechanism for rationalising products is too difficult and expensive. As a result, consumers remain in higher cost financial products.”

New APRA data validates End grandfathering life/risk advisers this year says ABA chief NEW insurance claims data released by the Australian Prudential Regulation Authority (APRA) appears to have validated the role of life/risk advisers.

The data found that, generally, clients are more likely to have success with an insurance claim if they have used an adviser.

It found that “advised business shows higher admittance rates than Individual non-advised for the same cover type”.

“This could be due to the policyholder having clearer expectations up front of what is covered by the product, or (related to the previous point) the adviser discouraging the policyholder from lodging a claim that is not covered by the policy,” the APRA analysis said.

It said the exception was Individual Advised Accident, which had an unusually low admittance rate.

“However, as noted above the number of observations is quite small (116 finalised claims, versus 3,260 for Non-Advised), plus the agencies were informed by the main writer of this product of some existing data limitations that have reduced the accuracy of their reported results.

The APRA analysis found that across all types of distribution channels, the admittance rate of claims was 92 per cent.

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THE Australian Banking Association (ABA) has declared that the implementation of changes to grandfathered advice commissions should happen this year.

ABA chief executive and former Queensland Labor Premier, Anna Bligh told a Sydney forum that while some of the recommendations of the Royal Commission will require “extensive consultation and consideration” there are others such as ending grandfathered commissions which can be implemented quickly.

“Without doubt, a number of recommended legislative reforms, such as changes to mortgage broker remuneration, enforceability of Codes and extending [the Bank Executive Accountability Regime] BEAR to product life cycle will

require extensive consultation and consideration,” she said.

“Equally, there are many that can and should be implemented as quickly possible,” Bligh said. “An end to grandfathered commissions in financial advice, a nationally consistent farm debt mediation scheme and changes to ongoing advice fees, among others, should all happen this year.”

“Australians should expect that whoever wins the next federal election will have a banking reform bill, with these and other reforms, in the Parliament within their first 100 days of being sworn in. I’d call on both sides to commit to taking this action,” she said.

“This will make for a busy second half in 2019, but the circumstances warrant action and urgency,” Bligh said.

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4/04/2019 10:20:56 AM

April 11, 2019 Money Management | 7

News

Is the end of general advice finally nigh?

BY HANNAH WOOTTON

FOLLOWING years of agitation by industry bodies and inquiries, the use of the term ‘general advice’ may finally be ending after a finding by the Australian Securities and Investments Commission (ASIC) that the division between personal and general advice confused consumers and placed their financial wellbeing at risk.

Financial Planning Association (FPA) chief executive, Dante De Gori, was cautiously optimistic that the report could be the trigger the Government needed to finally legislate on the issue.

“We welcome the report [by ASIC] because it’s vindicated the FPA’s position on this for the last 10 years for the abolition of the term general advice,” he told Money Management. “Advice should just mean advice, and only qualified planners should be giving it. It’s pretty simple but very significant.”

De Gori said that the term confuses consumers, labelling the differentiation between personal and general advice as a “complete mess”. This was backed up by findings from the Productivity Commission, the Financial Services Inquiry, and now ASIC. “But the Government is yet to do anything about it, so we’re hoping that this report will be what pushes them over,” the CEO said, saying that appropriate amendments to the Corporations Act to abolish the term needed to be legislated.

While a change of Government could be on the horizon come May, De Gori hoped that the fact that ASIC, as well as the various other bodies to make recommendations on this issue, “isn’t politically motivated” would see changes legislated regardless.

“We would hope whoever wins the election would take this on board,” he said.

“Enough things have lined up to say this unequivocally has to change … to move forward as an industry.”

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10 | Money Management April 11, 2019

News

APRA warns on group margin compression

BY MIKE TAYLOR

SUPERANNUATION funds have been urged to be cognisant of the government’s new Protecting Your Super legislation and not seek to press insurers to do more for less.

The note of caution was sounded by Australian Prudential Regulation Authority (APRA) senior manager, Suzanne Johnson who said the regulator was conscious that margins were tightening in the sector and that it did not want to see margin compression similar to four years’ ago.

Speaking on a panel at the Financial Services Council (FSC) Life Insurance Conference, Johnson acknowledged the impact of the changes with respect to reducing member insurance pools.

The panel had earlier heard

from Metlife’s James Carey that funds were actively working on strategies to ensure members were aware of their position and therefore actively

opt in.

Carey said the situation would vary from fund to fund but he expected premiums would increase.

FSC told to make insurance code enforceable THE Federal Government has ramped up pressure on the Financial Services Council (FSC) to ensure its Life Insurance Code of Conduct is enforceable.

The Assistant Treasurer, Stuart Robert used

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an address to the FSC Life Insurance Conference to declare the Government’s expectation that the FSC would seek Australian Securities and Investments Commission (ASIC) approval of the code.

“In due course, we expect the FSC will work co-operatively with ASIC to have the terms that govern the contract made between the insurer and the policyholder designated as ‘enforceable code provisions’,” he said.

Robert said the Government imagined this would occur as soon as practicable after it passed legislation providing ASIC with the necessary powers.

Elsewhere in his address to the conference, Robert signalled there would be no backing down from its approach to insurance inside superannuation, particularly with respect to those aged under 25 and those with account balances of less than $6,000.

However, a question mark remained over whether the Government would have time to navigate the necessary legislation – the Putting Members’ Interests First Bill – through the Parliament before it is dissolved ahead of the May Federal Election.

Political outlook grim on post-LIF remuneration THE major financial planning groups will have to work hard to retain life/ risk premiums beyond the 2021 review of the Life Insurance Framework (LIF) if the attitude of both Coalition and Labor politicians attending the Financial Services Council’s (FSC’s) Life Insurance Conference is a guide.

While the Liberal Party’s Jason Falinski told a conference panel that a Coalition Government would await the outcome of the LIF review before making a decision, the Opposition shadow assistant Treasurer, Matthew Thistlethwaite signalled a Labor Government was more likely to support the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

In the Royal Commission’s final recommendations, the Commissioner, Kenneth Hayne urged that the current cap on life/risk commissions should be reduced and ultimately set at zero.

However, reflecting the view of many of the major life/risk insurers, Integrity Life managing director and chief executive, Chris Powell stressed the importance of advice with respect to life/risk insurance.

Further, Powell agreed with the contention that insurance advice should be treated differently to investment advice.

3/04/2019 3:00:15 PM

April 11, 2019 Money Management | 11

News

ASIC cancels accounting firm licenses

BY MIKE TAYLOR

The Australian Securities and Investments Commission (ASIC) has broken new ground, cancelling the Australian Financial Services (AFS) licenses of two NSW accounting firms for failing to obtain membership of the Australian Financial Complaints Authority (AFCA).

ASIC announced it cancelled the licenses of Sydney Business Accounting and AG Calleia and Co. All AFS licensees, Australian credit licensees, superannuation trustees and other financial firms that provide services to retail clients were required to become members of AFCA by 21 September, last year.

Commenting on the cancellations, ASIC commissioner, Danielle Press said they were significant because it represented the first time the regulator had cancelled licenses for non-compliance with AFCA membership requirements.

ASIC said Sydney Business Accounting and AG Calleia and Co had also failed to lodge their annual financial statements with ASIC although Sydney Business Accounting had subsequently taken steps to comply with financial reporting obligations when ASIC raised concerns.

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See how the smaller fees apply to existing and new clients at amp.com.au/adviser/offers © NMMT Limited ABN 42 058 835 573, AFSL 234653 (NMMT). This advertisement has been provided by NMMT for adviser use only and must not be distributed or made available to retail clients. It contains general advice only and hasn’t taken any person’s specific situation into account. You should consider whether it is appropriate for you or your clients, and visit northonline.com.au to obtain the disclosure documents for MyNorth Super and Pension, MyNorth Investment and MyNorth Index Diversified Investment Options before deciding whether to acquire or vary these products for any person. Refer to the AMP Financial Services Guide for more information, including the fees and benefits that AMP companies and their representatives may receive in relation to products and services provided. Contact us on 1800 667 841 for a copy. MyNorth is a registered trademark of NMMT. MyNorth Super and Pension is issued by N.M. Superannuation Pty Limited ABN 31 008 428 322, AFSL 234654. MyNorth Investment is operated by NMMT. MyNorth Index Diversified Investment Options are issued by ipac asset management limited ABN 22 003 257 225, AFSL 234655.

05MM1104_01-14.indd 11

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12 | Money Management April 11, 2019

News

FPA welcomes FASEA accreditation of CFP

BY MIKE TAYLOR

FINANCIAL advisers will have the opportunity to gain a clearer picture of the status of their degrees as a result of the Financial Adviser Standards and Ethics Authority (FASEA) releasing

additional information from higher education providers on their historical degrees as well as the Financial Planning Association’s Certified Financial Planner (CFP) program.

The CFP program was assessed at two credits in the FASEA education standard.

FASEA released its Relevant Providers Degrees, Qualifications and Courses Standard Legislative Instrument which it said updated with additional information from higher education providers on their historical degrees as well as extending the range of approved historical programs.

It said the instrument also included the first approved recognition of prior learning for education undertaken to attain a professional

AFA urges opt-in on grandfathering THE Association of Financial Advisers (AFA) called for a three-year transition to the removal of grandfathering with consumers given the right to opt-in to existing arrangements.

In a submission filed with the Treasury, the AFA also called for key exemptions for some products such as lifetime annuities and whole of life products.

It also warned that banks are already telling financial advice lending clients that they are placing no value on grandfathered commission clients.

However, the key to the AFA submission is that clients should have the option to opt-in, in order to continue a grandfathered commission arrangement where they can continue to access financial advice.

It also urged that the Government provide capital gains tax (CGT) rollover relief and Centrelink rollover relief as result of any removal of grandfathering.

The AFA submission said that with respect to the future of grandfathering, there had been “no genuine debate on grandfathered commissions and no apparent appetite to understand the implications of this proposal”.

“This has been a highly political matter that has meant that genuine consideration of the implications has not occurred,” it said.

“We have taken a number of steps to try and ensure that there is a comprehensive analysis of the issue, however in many ways we have been discouraged from speaking up.”

The submission said the Royal Commission recommendation around granfathering and the response of the political parties had already “had a very material impact upon the financial advice sector”.

“We are aware of some banks who are already telling their financial advice lending clients that they are placing no value on grandfathered commission clients,” it said. “The outcome in this change of business valuation methodology is that it may put a material number of financial advice businesses in breach of their loan to value ratio obligations and therefore put their loan in default. This is happening even before the law has been passed.”

05MM1104_01-14.indd 12

designation.

The FASEA announcement said the FPA’s fiveunit Certified Financial Planner (CFP) program (commencing Semester 2, 2003) had been assessed pursuant to FASEA’s program and provider accreditation policy and as a result financial advisers/planners who had completed the program would receive two credits for the appropriate existing adviser pathways set out in FASEA’s Education Standard.

It said FASEA had also worked with higher education providers to enhance information on historical degrees, with industry associations to review potential recognition of learning opportunity following on from queries and information received from the industry.

Former ARs add to Westpac’s remediation challenge

LESS than a week after announcing the sale of is financial planning business to Viridian Advisory, Westpac admitted it is still a long way from determining precisely how much it will need to provision for advice remediation.

In an announcement to the Australian Securities Exchange (ASX) , Westpac said that its cash earnings in the first half of this financial year would be reduced by an estimated $260 million due to provisions arising from further work on its customer remediation programs.

However, it said this provisioning excluded any allowance for refunds to customers of authorised representatives (ARs) in relation to ongoing advice services fees which were still

being determined.

The ASX announcement said that of the estimated $260 million impact on cash earnings, approximately 90 per cent related to issues identified in previous financial years and that about half of the provisions related to the financial advice business while the remainder related to business and consumer banking.

It said the key remediation items included customer refunds associated with certain ongoing advice service fees charged by the group’s salaried financial planners and that the additional provisions reflected an increase in the estimated proportion of instances where records of financial advice were insufficient for the purposes of remediation.

The bank said it was focused on making refunds to customers as soon as possible and would commence remediation in the second half for customers of ARs still operating under BT Financial Group’s licences.

“Work is also underway to determine the extent of the services provided by authorised representatives who are no longer operating under BTFG’s licences, including those who have left the industry,” it said.

“This remediation program is more challenging, including because many of the AR’s files have been difficult to access,” the announcement said.

4/04/2019 10:19:18 AM

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14 | Money Management April 11, 2019

News

Labor brings forward target date to end negative gearing

BY MIKE TAYLOR

IF the Australian Labor Party gains office at the May Federal Election it will introduce its changes to negative gearing barely seven months’ later on 1 January, 2020.

The Shadow Treasurer, Chris Bowen confirmed the earlier than expected start-date for the negative gearing changes claiming that a 1 January start-date would coincide with a quieter time in the property cycle

allowing for smoother implementation.

He said that at the last Federal election the Opposition had said its negative gearing changes would come into force 12 months after the election, but this time it was targeting seven months but there would be no shortcuts.

“This enables proper legislative processes, draft legislation, proper consultation about how the legislation should be framed,” Bowen said.

Govt canvasses raising minimum super default insurance levels THE Federal Government directly canvassed lifting the default level of insurance cover included in MySuper products, including with respect to Total and Permanent Disability (TPD) insurance.

In an issues paper issued to the industry, the Treasurer, Josh Frydenberg, sought to portray as a response to the recommendations of the Royal

05MM1104_01-14.indd 14

Commission and canvassed lifting default levels of insurance alongside legislating universal key terms, definitions and exclusions.

The issues paper also canvassed the fact that some industry stakeholders have called for changes to the Superannuation Industry (Supervision) Regulations to specifically allow for insurance payouts to cover the cost of early intervention measures to facilitate members return to work.

On the question of raising default levels of insurance cover, the issues paper noted that the Superannuation Guarantee (Administration) Regulations already require minimum levels of death cover for MySuper members but noted that the Royal Commission had suggested whether these minimum requirements should be increased.

“Increasing these thresholds and/or extending the minimum requirements to TPD insurance as well as death could set a signpost for trustees in terms of the minimum expected level of cover and provide members with a level of certainty around the level of cover they will receive in a MySuper product,” the issues paper said.

“At the same time, an increased minimum level of cover would not prevent trustees from setting a level of default cover in excess of a minimum level, and trustees would still be bound by their obligations to act in the best interests of their members when determining the level of default cover offering within their MySuper product, meaning this alone will not act as a guarantee of standardised cover for MySuper products,” it said.

Bowen commits to abolition of SMSF LRBAs THE Federal Opposition has moved directly counter to the Government on Limited Recourse Borrowing Arrangements (LRBAs) with Shadow Treasurer, Chris Bowen signalling a Labor Government will legislate to end the practice within self-managed superannuation funds (SMSFs).

Barely two days after the Treasurer, Josh Frydenberg signalled the Government would allow the LRBA situation to continue subject to a review in three years’ time, Bowen accused the Government of failing to grasp the nettle and said a Labor Government would be moving for abolition.

“As it stands it will be left to a Labor government to take the responsible decision and adopt the recommendation of the Financial System Inquiry – a report delivered years ago – to restore the prohibition on direct borrowing by superannuation funds on a prospective basis,” he told a Sydney conference.

Bowen accused Frydenberg of deliberately ignoring the concerns of the Council of Financial Regulators (CFR) and the Australian Taxation Office (ATO) which had produced a report which stated: “The regulator members of CFR and the ATO note that no longer allowing limited recourse borrowing will address a number of significant risks which could be detrimental to individuals’ retirement incomes due to shifts in the property market, particularly for those with high levels of leverage and low diversification of assets”.

Elsewhere in his speech, Bowen committed to lifting the superannuation guarantee to 12 per cent without further delay.

3/04/2019 2:58:59 PM

April 11, 2019 Money Management | 15

InFocus

GREAT EXPECTATIONS OF RETIREMENT Arthur Marusevich writes that there is a significant gap between people’s great expectations of retirement and the financial realities of life post-retirement. In the face of Australia’s aging population, containing this gap is a fiscal and social necessity.

IN THE 1861 Charles Dickens classic Great Expectations, Pip’s financial rise from impoverishment occurs as a result of his great expectation of wealth from visiting Ms Havisham’s house. After becoming the heir of an unknown benefactor and the recipient of great expectations, Pip spends many years searching for his benefactor’s identity. At first, he believes that Miss Havisham is the benefactor. But when Pip discovers that she is not, he is left disappointed and realises that great expectations are often not how reality is.

So, what does Pip’s great expectation have to do with superannuation?

Importantly, Pip reminds us of the great expectations many Australians have about their retirement. As one recent study reveals, great expectations of retirement are adversely affecting people’s ability to plan for retirement. Inaccurate expectations early on interfere with retirement plans and prevent people from maximising their opportunity to plan for a desired retirement lifestyle. The greater the inaccuracy, the greater the disappointment in retirement.

Disappointment due to overoptimism can be particularly hard to overcome post-retirement. This is because any plans for a particular retirement lifestyle is more likely to be achieved during the accumulation stage.

With the old-aged dependency ratio increasing, over the next two decades, great expectations of retirement will pose substantial challenges. For this reason,

05MM1104_01-14.indd 15

governments and superannuation funds have a collective responsibility to act now, to design and implement effective retirement policies and products for supporting Australians with their retirement.

GREAT EXPECTATIONS OF RETIREMENT Seeking something out of nothing is part of human nature, more so

when the trait is coupled with the strange persistence in believing that it is possible. People instinctively want to save for the future in ways that allow them to spend their money now.

Unfortunately, often the two are impossible to balance, which is why many end up spending their money now without any realistic plans for retirement. As the Global Investor Study 2018 (the

study) reveals, this is particularly the case with many Australians.

More than 1,200 Australians participated in the study. The participants provided details of their expectations of retirement in areas of retirement spending, retirement income, retirement savings and investment in retirement. The results show just Continued on page 16

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16 | Money Management April 11, 2019

InFocus

Continued from page 15 how wishful Australians are when it comes to expectations for retirement compared to what retirees experience in retirement.

Retirement spending One of the biggest misconceptions Australians have about retirement is how much of their retirement savings will be spent on living expenses. Those who are yet to retire expect to spend 39 per cent of their retirement income on living expenses; whereas retired people spend around 58 per cent of their retirement income on living expenses – not including healthcare or travel expenses.

In a country that has one of the highest living standards in the world, the gap of nearly 20 per cent is a major concern. That means many Australians are currently saving 20 per cent less than what they may require for living expenses in retirement.

Retirement income Australians who are aged 55 and over expect they will need on average 71 per cent of their current salary or income to live a comfortable retirement. However, those retired are currently receiving only 52 per cent of their final salary per annum – again, a gap of nearly 20 per cent.

Retirement savings Despite feeling the need to save on average 15 per cent for a comfortable retirement, working Australians are currently saving 12 per cent of their income. While the discrepancy is only three per cent, the gap is nonetheless concerning given that at least 9.5 per cent of the 12 per cent savings comes from compulsory contributions.

Investing in retirement Australians continue to invest their wealth in retirement. Those who are yet to retire plan to dedicate on average 13.3 per cent of their retirement savings to

05MM1104_01-14.indd 16

continued investing; whereas those retired are allocating nearly 19.1 per cent of their pension savings to investment to fund their retirement needs.

Millennials In the case of millennials, expectations for retirement is even more unrealistic. Millennials expect to spend only 27 per cent of their retirement income on living expenses – that is a gap of 31 per cent between expected expenditure and what retired people spend.

The gap is particularly concerning because millennials have the longest opportunity to make the most impact on their retirement outcomes. Yet this is not the case.

So why is there such a gap between people’s expectations of retirement and retirement in reality; importantly, what can be done to narrow the gap?

FATALISTIC VIEW OF SUPERANNUATION Lack of engagement with superannuation is one of the main reasons why many Australians

have great expectations of retirement.

For instance, a survey of Australians aged 25 – 44 years old conducted by Galaxy Research in 2012 found that 60 per cent of participants described superannuation as ‘baffling’, ‘boring’, ‘difficult to understand’ and ‘for people older than me’.

Only 25 per cent thought superannuation was ‘interesting’ and ‘motivating’. One would hope that these figures would improve over the years as superannuation became more significant in Australia. Unfortunately, this is not the case.

A recent study by Finder has revealed that only 42 per cent of Australians know their superannuation account balances – ironically, the majority of these are younger people who are least financially secure. Only 37 per cent of Generation Y know what their current superannuation balance is: 11 per cent do not remember, seven per cent do not bother to check and six per cent do not know how to check.

The Study by Finder has also revealed that there is little

planning for retirement even by those approaching retirement.

Less than 10 per cent of retirees develop a formal financial plan prior to retirement. Those who do develop a plan do so at the time of retirement, not prior to retirement. As a result, many are either unaware of how superannuation works or willingly opt out of active participation.

One does not need to travel far to understand why people have a lax approach to superannuation.

Given that superannuation accounts are long-term savings accounts, their relevance in the lives of Australians is minimal compared to everyday bank accounts. The perception that superannuation balances are inaccessible is why many see superannuation as insignificant. It is this false perception that fosters a culture of lax attitude of superannuation, and it needs to change.

A NEW PERCEPTION OF SUPERANNUATION To change people’s lax attitude of superannuation, there needs to be interdependence between people and their superannuation accounts.

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April 11, 2019 Money Management | 17

InFocus

One way of creating this interdependence is to promote accessibility of superannuation balances as investment and savings, rather than expenditure only.

If the perception of accessibility can be transformed from expenditure only to investment and growth, the interdependence between Australians and their superannuation accounts will increase. This will compel people to become more involved with their superannuation accounts and develop a positive mindset and genuine desire to make retirement a great experience.

Of course, active engagement with superannuation alone is not adequate. Australians would also need to be empowered with the necessary tools, including financial literacy and effective products.

EMPOWERING AUSTRALIANS WITH SUPER FINANCIAL LITERACY Financial literacy for developing a successful retirement plan does not require a person to have a degree in finance or economics.

Effective financial decisions in relation to allocating assets in superannuation investment options, determining saving rates and negative returns, making voluntary contributions to maximise retirement savings, creating a self-managed superannuation fund (SMSF) plan, or consolidating multiple superannuation accounts, can all be achieved with basic financial knowledge.

Increasingly, Australians are required to interact with complex superannuation accumulation and decumulation products. For example, while direct investment options are designed to provide people with greater control and flexibility over their superannuation savings, they can also be quite complicated, especially for those who do not

05MM1104_01-14.indd 17

have basic financial literacy.

How will a person interpret investment results and adequately consider their options without basic financial literacy?

That is why education is key, and governments and superannuation funds have an important role to play in educating Australians on how to develop and execute their retirement plans, especially from an early age.

Indeed, financial literacy from an early age will not only afford basic skills for managing investments and savings but will also promote a culture of financial awareness. Young Australians will be empowered with the knowledge of responsible financial management. In the words of Senator Judith Adams: “If superannuation and other financial management issues were addressed at a middle or high school level, it is anticipated that school leavers would graduate with at least a basic level of awareness about savings and retirement income.”

For those not of school age but under 40, superannuation funds need to consider their role in improving their members’ financial literacy, especially through information provided to members in the form of annual member statements, brochures, seminars, and website or marketing content. Currently, more than half of the information communicated to members by superannuation funds does not get read; members want to access information that is relevant and understandable.

Basic financial literacy can also be extended to those who are in transition to retirement and those already retired. As postretirement investment becomes the new trend, superannuation funds should also take the opportunity to increase their retired members’ financial literacy and awareness,

especially on how to use postretirement investment products and their associated risks.

SUPERANNUATION PRODUCTS – LESS AND SIMPLICITY ARE BEST In addition to empowering Australians with financial literacy, the development of efficient superannuation products in consultation with members would greatly assist them in planning and executing their retirements.

Currently, in developing superannuation products, such as direct investment options, superannuation funds do not adequately consult with or educate their members on how the products are designed to work. As a result, many end up not using these products at all, or those who do use them find them complicated and unhelpful.

A recent report published by Industry Super Australia also suggests that superannuation funds that proliferate their members with investment products underperform than those who offer a limited range of simple investment products.

Therefore, it is evident that members would benefit from simplified product structures and fewer investment options.

It is also time for superannuation funds and governments to step up and create effective post-retirement products to support people during retirement and deliver income streams to retirees. The delivery of post-retirement products will not only ensure the necessary cultural shift for people in the accumulation stage but also provide retirees with a new source of income.

In fact, superannuation funds should be able to offer or default members into investing post retirement. This will not only help members to start thinking about investing through retirement but will also send a wider message to

the community about the financial realities of retirement.

The Comprehensive Income Products for Retirement (CIPRS) initiative is already tilting the retirement phase or decumulation of Australia’s superannuation system towards the provision of retirement income. Of course, there is much to be done with CIPRS, including addressing the issue of proportionality of investments of balances and participation; however, it is comforting to see that such products are already being developed.

CONCLUSION When Charles Dickens originally wrote Great Expectations, he succumbed to an audience desperate for some optimism and hope that their own great expectations may one day become a reality.

There is a real danger with the way many Australians are approaching their retirement planning, especially in the current environment of slow wages growth, lower returns, and increasing inflation. In the face of Australia’s aging population, great expectations for retirement without realistic planning can have a devastating impact on the future of Australia’s fiscal outlook.

Of course, the responsibility of making decisions in relation to the management of superannuation savings and accumulation rests with each person. However, to fulfil this responsibility, Australians need support, and superannuation funds and governments bear a collective responsibility to transform people’s view of the superannuation system and empower them with effective tools for retirement.

Arthur Marusevich is a lawyer and Legal and Compliance General Counsel at the Commonwealth Superannuation Corporation.

3/04/2019 2:58:30 PM

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1/04/2019 4:44:57 PM

investmentcentre.moneymanagement.com.au

INVESTMENT CENTRE a part of

POSITIVE RETURNS IN VOLATILE MARKETS? ABSOLUTELY Anastasia Santoreneos writes that investors looking for a little less exposure to market volatility and a little more value need look no further than absolute return strategies.

ABSOLUTE RETURN STRATEGIES are known for getting positive returns in volatile markets, with preserving capital a specialty of managers in the asset class.

But who are they for? Well, ARCO Investment Management’s chair, Bruce Loveday, said if you got right down to it and offered investors a choice between having more or less wealth in 12 months’ time, they’d obviously choose the former. And given that’s what absolute return strategies are designed to do, you’d think it’s a no brainer.

Looking a little further under the hood though, Gen Y probably isn’t too stressed about market volatility or taking risks, so you could say absolute return strategies would suit the more cautious investor.

So, should you be a cautious investor or find yourself advising one, what do you need to be aware of, and what assets should you keep an eye on?

ABSOLUTELY FOCUSED ON CAPITAL PRESERVATION The purest form of an absolute return benchmark is zero, according to Loveday, which means the strategy is successful if it produces a positive rate of return, irrespective of the market.

While relative return strategies suit investors so long as their performance benchmarks are going up, they’re less appealing when markets fall and chew up investors’ capital.

By contrast, Loveday said, successful absolute return strategies are designed to protect investors against capital loss, and

05MM1104_16-34.indd 19

grow their wealth irrespective of the market environment.

Data from FE Analytics showed for the 12 months to 31 December last year, the S&P ASX 300 returned -3.06 per cent, but the Absolute Return sector sat slightly above, with -2.97 per cent returns.

The top fund, Bennelong Wheelhouse Global Equity Income, significantly outperformed the S&P ASX 300, returning 7.36 per cent, with the second-top fund, Perpetual Pure Equity Alpha, similarly outperforming the relative return benchmark with 3.97 per cent returns.

Loveday said absolute return managers employed many techniques to achieve continuous capital preservation, including: • Investing across more than one asset class, so that when one type of asset has a poor outlook, the are able to invest elsewhere; • Being prepared to hold large amounts of their portfolio in cash when the outlook of investment markets is weak; or • Being able to take short

positions in either individual assets or indices, either to profit from falling prices or to hedge out risk (or both).

THE ROLE OF ABSOLUTE RETURN STRATEGIES IN A PORTFOLIO While absolute return strategies are going to preserve capital, investors in the asset class shouldn’t expect to outperform a relative return strategy when markets rally.

“An investor with a very low appetite for risk or a very short investment time horizon may be most comfortable (‘sleep at night’) with a substantial exposure to absolute return strategies, because avoiding a loss is much more important to them than the prospect of making a windfall gain,” Loveday said.

“The real answer is that the extent to which various investment strategies should form part of an investor’s portfolio is a matter for the investor and their adviser.”

Loveday flagged investors

Chart 1: Performance of the ACS Absolute Return sector against the performance of the S&P ASX 300 for the three years to date.

Source: FE Analytics

ANASTASIA SANTORENEOS

seeking some diversification could also invest in multiple absolute return strategies for that benefit.

GETTING STOCK-SPECIFIC Though Loveday said all investment assets have the potential to deliver improved returns to their owner over time, “good” absolute returns assets were those that were underpriced relative to their fundamental value, and vice versa.

While that sounds a little all-toofamiliar to the old “buy low, sell high” saying, the crucial criterion is actually the manager’s assessment of fundamental value relative to price, and their prediction as to whether there is likely to be a trigger to unlock the under (or over) valuation.

When selecting stocks, ARCO looks for company specific drivers as well as broader market factors like sentiment, thematic bias, and global capital flows.

“The risk taken, having regard to all of the above, for the return expectation we have for our clients is the critical stock selection criteria,” he said.

3/04/2019 3:01:22 PM

INVESTMENT CENTRE

a part of

ACS CASH - AUSTRALIAN DOLLAR

ACS EQUITY - AUSTRALIA EQUITY INCOME

Fund name

1m

1y

3y

Fund name

1m

1y

3y

Macquarie Australian Diversified Income ATR in AU

0.34

2.38

3.09

2

Armytage Australian Equity Income ATR in AU

7.1

4.94

11.43

111

Macquarie Diversified Treasury AA ATR in AU

0.33

2.36

3.02

2

Nikko AM Australian Share Income ATR in AU

7.64

3.07

11.33

110

Mutual Cash Term Deposits and Bank Bills B ATR in AU

0.18

2.26

2.29

0

Plato Australian Shares Income A ATR in AU

6.8

6.67

10.66

102

Pendal Stable Cash Plus ATR in AU

2.27

5

Zurich Investments Equity Income Pool ATR in AU

0.19

2.2

4.8

6.15

9.95

79

Mutual Cash Term Deposits and Bank Bills A ATR in AU

3.65

3.44

9.78

64

2.26

2.26

0

Lazard Defensive Australian Equity ATR in AU

0.17

Lincoln Australian Income Wholesale ATR in AU

Australian Ethical Income Wholesale ATR in AU

4.46

7.54

9.52

95

0.24

1.99

2.16

1

7.09

-0.87

9.22

110

CFS Colonial First State Wholesale Cash ATR in AU

Nikko AM Australian Share Concentrated LT ATR in AU

0.19

1.99

2.05

0

6.21

0.24

9.2

101

IOOF Cash Management Trust ATR in AU

Legg Mason Martin Currie Equity Income X ATR in AU

0.17

2.05

2.05

0

Merlon Australian Share I ATR in AU

7.42

-2.03

9.13

116

Mercer Cash Term Deposit Units ATR in AU

0.16

2.04

2.03

2

7

-0.93

8.82

102

Mutual Cash Term Deposits and Bank Bills C ATR in AU

Legg Mason Martin Currie Ethical Values with Income A ATR in AU

0.16

2

2

0

Crown Rating

Risk Score

Crown Rating

Risk Score

ACS EQUITY - AUSTRALIA SMALL/MID CAP ACS EQUITY - ASIA PACIFIC EX JAPAN Fund name

1m

1y

3y

Schroder Asia Pacific Wholesale ATR in AU

6.5

2.62

18.93

122

Fidelity Asia ATR in AU

8.41

11.28

18.09

112

Advance Asian Equity Wholesale ATR in AU

6.06

-2.13

17.71

117

SGH Tiger ATR in AU

3.65

0.81

17.22

125

Advance Asian Equity ATR in AU

6

-3.06

16.6

117

Maple-Brown Abbott Asia Pacific Trust ATR in AU

3.66

2.17

15.98

101

Crown Rating

Risk Score

Maple-Brown Abbott Asian Investment Trust ATR in AU

4.54

2.16

15.25

105

Premium Asia ATR in AU

7.46

0.13

15.19

131

T. Rowe Price Asia Ex Japan ATR in AU

4.97

0.82

14.55

118

CFS FirstChoice Wholesale Asian Share ATR in AU

4.81

-0.94

13.97

104

Fund name

1m

1y

3y

Macquarie Small Companies ATR in AU

3.9

3.2

20.01

118

Macquarie Australian Small Companies ATR in AU

3.91

2.93

19.52

118

Allan Gray Australia Equity A ATR in AU

6.09

6.97

18.42

109

Allan Gray Australia Equity B ATR in AU

6.16

7.48

17.86

109

Cromwell Phoenix Opportunities ATR in AU

4.44

4.31

17.56

101

Pendal MicroCap Opportunities ATR in AU

7.21

3.49

16.31

98

Fidelity Future Leaders ATR in AU

6.42

9.53

15.66

109

Smallco Investment Manager Smallco Investment ATR in AU

13.74 12.92

15.56

140

OC Micro-Cap ATR in AU

5.45

-5.81

15.46

106

Perennial Value Smaller Companies Trust ATR in AU

5.45

1.21

15.37

108

Crown Rating

Risk Score

ACS EQUITY - EMERGING MARKETS

ACS EQUITY - AUSTRALIA

Fund name

1m

1y

3y

113

Legg Mason Martin Currie Emerging Markets ATR in AU

4.7

-1.61

19.36

120

16.21

106

CFS Realindex Emerging Markets A ATR in AU

2.32

3.96

19.21

101

5.7

15.96

100

JPMorgan Emerging Markets Opportunities ATR in AU

3.51

1.17

19.16

106

5.99

5.52

15.79

101

MFS Emerging Markets Equity Trust ATR in AU

2.89

0.81

16.41

96

Macquarie Australian Equities ATR in AU

5.98

5.48

15.6

101

OnePath Wholesale Global Emerging Markets Share ATR in AU

2.77

1.61

16.17

95

Legg Mason Martin Currie Select Opportunities X ATR in AU

6.87

-0.48

15.49

112

Schroder Global Emerging Markets Wholesale ATR in AU

3.1

-2.06

16.08

106

DDH Selector Australian Equities ATR in AU

8.68

10.11

15.47

131

Dimensional Emerging Markets Trust ATR in AU

2.21

-1.05

15.66

91

Solaris Core Australian Equity I ATR in AU

6.6

8.85

15.4

101

Fidelity Global Emerging Markets ATR in AU

3.8

2.4

15.51

98

Solaris High Alpha Australian Equity ATR in AU

6.97

7.64

15.11

106

1.95

-0.02

15.25

93

Lazard Select Australian Equity I ATR in AU

GMO Emerging Markets Trust ATR in AU

5.77

6

14.95

109

Macquarie True Index Emerging Markets ATR in AU

2.72

-1.29

15.19

104

Fund name

1m

1y

3y

Dimensional Australian Value Trust ATR in AU

7.59

6.99

18.58

Solaris High Alpha Australian Equity Inst ATR in AU

7.05

8.67

Macquarie Australian Shares ATR in AU

5.96

Macquarie Wholesale Australian Equities ATR in AU

05MM1104_16-34.indd 20

Crown Rating

Risk Score

Crown Rating

Risk Score

3/04/2019 4:36:37 PM

INVESTMENT CENTRE

a part of

ACS EQUITY - GLOBAL

ACS EQUITY - INFRASTRUCTURE

Fund name

1m

1y

3y

Fund name

1m

1y

3y

CFS FirstChoice Acadian Wholesale Geared Global Equity ATR in AU

6.15

5.32

22.96

249

Macquarie Global Infrastructure Trust II A ATR in AU

2.25

31.08

29.83

198

Hyperion Global Growth Companies B ATR in AU

5.72

21.87

20.6

122

Macquarie Global Infrastructure Trust II B ATR in AU

CFS FirstChoice Wholesale Geared Growth Plus ATR in AU

2.23

30.88

29.42

196

7.74

4.91

18.51

150

Lazard Global Listed Infrastructure ATR in AU

2.55

13.3

13.27

90

CFS Generation WS Global Share ATR in AU

6.82

15.61

18.49

109

3.16

19.98

12.57

85

Zurich Investments Concentrated Global Growth ATR in AU

RARE Infrastructure Income ATR in AU

8.31

19.79

17.98

128

Redpoint Global Infrastructure Retail ATR in AU

3.45

17.09

12.47

107

T. Rowe Price Global Equity ATR in AU

6.18

11.85

17.34

114

CFS FirstChoice Wholesale Geared Global Share ATR in AU

5.44

26.72

12.45

87

6.09

3.79

16.27

159

BlackRock Global Listed Infrastructure ATR in AU

Nanuk New World ATR in AU

6.64

2.61

16.2

112

Redpoint Global Infrastructure ATR in AU

3.38

16.26

11.69

107

PM Capital Long Term Investment ATR in AU

5.31

3.38

16.02

125

3.39

15.09

11.07

85

Loftus Peak Global Disruption ATR in AU

Macquarie Hedged Index Global Infrastructure Securities ATR in AU

6.84

10.38

15.97

148

Macquarie True Index Global Infrastructure Securities ATR in AU

5.38

22.85

11.02

86

CFS Colonial First State Wholesale Global Listed Infrastructure Securities ATR in AU

2.94

12.64

10.94

82

Crown Rating

Risk Score

ACS EQUITY - GLOBAL HEDGED

Risk Score

Fund name

1m

1y

3y

Russell Global Opportunities NZ Hedged A AUD ATR in AU

3.84

3.15

15.54

112

ACS EQUITY - SPECIALIST

Zurich Investments Hedged Concentrated Global Growth ATR in AU

5.66

9.96

15.17

144

1m

1y

3y

Macquarie Arrowstreet Global Equity Hedged ATR in AU

Fund name

2.5

2.17

14.7

119

Russell Global Opportunities NZ Hedged B AUD ATR in AU

BT Technology Retail ATR in AU

7.23

17.51

24.07

156

3.75

1.78

14.02

112

Fiducian Technology ATR in AU

7.91

11.69

19.8

171

7.16

15.46

19.2

140

Crown Rating

Risk Score

Crown Rating

Crown Rating

Risk Score

MLC Wholesale Hedged Global Share A ATR in AU

4.18

0.12

13.74

111

CFS Wholesale Global Technology & Communications ATR in AU

Cooper Investors Global Equities Hedged ATR in AU

5.63

4.22

13.59

110

Platinum International Brands C ATR in AU

7.66

2.92

15.79

107

Fidelity Hedged Global Equities ATR in AU

3.28

2.34

13.57

113

Barwon Global Listed Private Equity ATR in AU

3.16

0.45

14.47

103

Evans And Partners International Hedged ATR in AU

4.53

11

13.53

113

6.77

16.05

13.91

119

CFS Realindex Global Share Hedged Class A ATR in AU

Platinum International Health Care C ATR in AU

2.17

-0.3

13.44

109

4.91

17.43

13.54

138

Mercer Hedged International Shares ATR in AU

CFS Wholesale Global Health & Biotechnology ATR in AU

3.41

1.56

13.38

120

Platinum International Technology C ATR in AU

5.36

2.69

12.63

102

CFS Colonial First State Australian Share Growth ATR in AU

6.56

5.84

9.83

108

IML Industrial Share ATR in AU

3.49

1.01

8.2

92

ACS EQUITY - GLOBAL SMALL/MID CAP Crown Rating

Fund name

1m

1y

3y

Yarra Global Small Companies ATR in AU

6.75

9.37

14.5

115

ACS FIXED INT - AUSTRALIA / GLOBAL

Supervised The Supervised ATR in AU

-1.32

-3.93

13.11

105

Fund name

1m

1y

3y

Dimensional Global Small Company Trust ATR in AU

6.65

5.88

12.67

117

IOOF MultiMix Diversified Fixed Interest ATR in AU

0.53

3.51

4.18

14

Bell Global Emerging Companies ATR in AU

0.64

4.24

3.9

16

6.01

16.22

12.66

104

PIMCO Diversified Fixed Interest ATR in AU PIMCO Diversified Fixed Interest Wholesale ATR in AU

0.64

4.2

3.84

16

Mercer Global Small Companies Shares ATR in AU

6.46

7.09

12.34

120

Onepath Wholesale Diversified Fixed Interest Trust ATR in AU

0.61

4.12

3.68

15

Pengana International Ethical Opportunity ATR in AU

3.84

3.62

11.99

75

Macquarie Dynamic Bond ATR in AU

0.45

4.29

3.64

20

Pengana Global Small Companies ATR in AU

4.77

-3.45

11.83

85

UBS Diversified Fixed Income Fund ATR in AU

0.62

4.33

3.4

15

OnePath Optimix Wholesale Global Smaller Companies Share Trust B ATR in AU

0.52

3.9

3.37

18

5.88

Aberdeen Standard Diversified Fixed Income ATR in AU

0.67

4.5

3.29

18

Fiducian Global Smaller Companies and Emerging Markets ATR in AU

CFS FirstChoice Wholesale Fixed Interest ATR in AU

4.28

0.54

11.67

88

OnePath Optimix Wholesale Global Smaller Companies Share Trust A ATR in AU

AMP Capital Specialist Diversified Fixed Income A ATR in AU

0.79

4.12

3.28

15

5.86

4.17

11.57

110

ClearView CFML Fixed Interest ATR in AU

0.71

3.14

3.1

12

05MM1104_16-34.indd 21

4.33

11.78

Risk Score

110

Crown Rating

Risk Score

3/04/2019 4:36:21 PM

INVESTMENT CENTRE

a part of

ACS FIXED INT - AUSTRALIAN BOND

ACS FIXED INT - GLOBAL STRATEGIC BOND

Fund name

1m

1y

3y

DDH Preferred Income ATR in AU

0.54

3.95

7.28

IOOF Income ATR in AU Legg Mason Western Asset Australian Bond X ATR in AU

Crown Rating

Risk Score

1m

1y

3y

12

Pimco Dynamic Bond C ATR in AU

Risk Score

0.32

2.51

5.77

13

0.31

2.39

5.67

13

0.34

3.04

4.32

5

Pimco Dynamic Bond Wholesale ATR in AU

1

6.22

4.05

21

Dimensional Global Bond Trust NZD ATR in AU

1.07

8.06

4.97

24

JPMorgan Global Strategic Bond ATR in AU

0.7

0.75

3.86

17

Dimensional Global Bond Trust AUD ATR in AU

0.38

4.46

3.39

24

IOOF Strategic Fixed Interest ATR in AU

0.25

2.77

2.59

6

Australian Unity Strategic Fixed Interest Trust Wholesale ATR in AU

0.43

2.13

2.47

6

T. Rowe Price Dynamic Global Bond ATR in AU

-0.19

-0.98

1.91

19

The Trust Company Bond ATR in AU

0.64

3.05

3.94

8

BlackRock Enhanced Australian Bond ATR in AU

0.98

6.18

3.86

21

Smarter Money Higher Income Direct Investor ATR in AU

0.36

2.12

3.83

4

Macquarie Core Australian Fixed Interest ATR in AU

0.99

6.13

3.79

21

Morningstar Australian Bonds Z ATR in AU

0.9

5.81

3.72

20

Legg Mason Western Asset Australian Bond A ATR in AU

0.97

5.83

3.71

21

AMP Capital Wholesale Australian Bond ATR in AU

Crown Rating

Fund name

0.98

5.89

1m

1y

3y

Ardea Real Outcome ATR in AU

0.67

3.78

5.02

22

PIMCO Global RealReturn Wholesale ATR in AU

-0.26

2.11

4.99

45

Ardea Premier Australian Inflation Linked Bond ATR in AU

0.54

5.43

3.42

32

Mercer Australian Inflation Plus ATR in AU

0.57

3.42

3.18

11

Risk Score

Ardea Australian Inflation Linked Bond ATR in AU

0.52

5.16

3.18

32

ACS FIXED INT - DIVERSIFIED CREDIT Crown Rating

Crown Rating

Fund name

22

3.68

ACS FIXED INT - INFLATION LINKED BOND Risk Score

Fund name

1m

1y

3y

Bentham Global Income NZD ATR in AU

1.52

4.25

9.23

44

Morningstar Global Inflation Linked Securities Hedged Z ATR in AU

0.16

3.5

2.75

21

Bentham High Yield ATR in AU

1.57

3

8.83

29

Macquarie Inflation Linked Bond ATR in AU

0.55

5.51

2.74

32

0.19

3.52

2.06

19

Bentham Syndicated Loan NZD ATR in AU

1.87

5.65

8.8

45

Aberdeen Standard Inflation Linked Bond ATR in AU

Premium Asia Income ATR in AU

2.34

2.88

8.64

40

ACS PROPERTY - AUSTRALIA LISTED

Pimco Capital Securities Wholesale ATR in AU

1.58

-0.66

8.03

40

1m

1y

3y

Bentham Syndicated Loan ATR in AU

1.22

2.2

7.8

19

Fund name

Bentham Global Income ATR in AU

0.87

0.61

7.75

19

AU Property Securities Growth Units ATR in AU

0.06

22.37

11.68

144

DirectMoney Personal Loan ATR in AU

0.69

8.31

7.67

17

Charter Hall Maxim Property Securities ATR in AU

2.77

16.74

11.44

79

CFS Wholesale Global Credit ATR in AU

1.04

3.9

5.53

15

Crescent Wealth Property Retail ATR in AU

2.3

10.59

10.89

66

Firstmac High Livez Wholesale ATR in AU

0.36

4.26

5.04

10

Macquarie Property Securities ATR in AU

3.03

22.06

10.52

116

Macquarie Wholesale Property Securities ATR in AU

3.02

21.75

10.4

116

Resolution Core Plus Property Securities A PF ATR in AU

1.77

18.8

10.33

106

Risk Score

UBS Property Securities Fund ATR in AU

2.93

20.49

10.22

109

AMP Capital Listed Property Trusts ATR in AU

3.3

23.62

10.19

112

AMP Capital Property Securities ATR in AU

3.31

23.5

10.05

112

Pendal Property Investment ATR in AU

2.99

20.73

9.65

105

Fund name

1m

1y

3y

ACS FIXED INT - GLOBAL BOND Fund name

1m

1y

3y

Crown Rating

Crown Rating

Risk Score

PIMCO Emerging Markets Bond ATR in AU

-0.08

-3.07

7.3

49

PIMCO Emerging Markets Bond Wholesale ATR in AU

-0.08

-3.19

7.23

49

Invesco Senior Secured Loans ATR in AU

1.7

2.76

7

24

Invesco Wholesale Senior Secured Income ATR in AU

1.69

2.72

6.92

24

CFS Colonial First State Wholesale Geared Global Property Securities ATR in AU

2.62

16.82

12.88

219

Pimco Income Wholesale ATR in AU

0.71

3.29

6.52

17

Premium Asia Property ATR in AU

1.23

4.05

12.4

148

Mercer Emerging Markets Debt ATR in AU

1.22

-0.71

6.32

68

Resolution Capita Global Property Securities Hedged II ATR in AU

0.97

13.55

10.88

97

Franklin Templeton Multisector Bond I ATR in AU

ACS PROPERTY - GLOBAL

0.76

2.3

5.82

53

Franklin Templeton Multisector Bond W ATR in AU

0.74

2.06

5.58

53

Templeton Global Bond Plus I ATR in AU

0.94

4.06

5.24

45

Supervised Global Income ATR in AU

0.95

1.79

5.2

43

Crown Rating

Risk Score

Quay Global Real Estate C ATR in AU

3.24

26.51

10.72

92

IOOF Specialist Property ATR in AU

1.81

18.28

10.62

86

Advance Global Property ATR in AU

0.78

15.72

10.48

96

Principal Global Property Securities ATR in AU

0.77

15.61

10.3

96

Resolution Global Property Securities B NPF ATR in AU

0.96

13.53

10.27

97

Quay Global Real Estate A ATR in AU

3.16

26.93

10.27

92

Resolution Global Property Securities A PF ATR in AU

0.86

14.09

10.26

97

The tables and data contained in the Investment Centre are intended for use by professional investors and advisers only and are not to be relied upon by any other persons.

05MM1104_16-34.indd 22

3/04/2019 4:36:08 PM

April 11, 2019 Money Management | 23

Tax strategies

WHEN TAX TIME FALLS DURING A FEDERAL ELECTION As 30 June approaches, advisers are starting to look at how to best leverage tax concessions to benefit their clients’ bottom lines. Even during a Federal Election campaign focusing on personal tax policies, Chris Dastoor finds that there are still many strategies that advisers can rely on.

WITH THE FEDERAL election looming, policy and regulation proposals can lure investors into a trap of over-thinking their overall strategy.

It’s important to focus on what you know you can do, rather than make drastic decisions over changes that may never happen.

Indeed, according to Roger Cohen, senior investment specialist at BetaShares, this year isn’t different to previous years, despite the discussion around the future consequences of the Federal Election.

05MM1104_16-34.indd 23

MAKING FULL USE OF SUPER CONCESSIONS “The biggest things people can do is get money into superannuation if they haven’t made their maximum contributions,” Cohen said. “The other thing to look at is franking credits: the rules are still the same, they’re still entitled to franking credit refunds and are very valuable to offset your ordinary income.”

Cohen recommended reviewing your position with respect to realised gains and losses, as those can be used to

offset each other.

“If you have assets in a loss situation and you don’t mind selling those assets, you could sell them and realise a loss which would offset the gains,” Cohen said.

Craig Day, head of tech services at Colonial First State, said it’s an ideal time to make use of concessional contributions.

“This is your superannuation guarantee or salary sacrifice contribution, everyone has a $25,000 cap to those,” Day said.

“What people can do is salary sacrifice up to the cap, taking into

account their super guarantee contribution.”

These contributions can be claimed as a tax deduction, but only if they are done by 30 June.

Your other option is making personal deductible contributions, but they will also count towards the cap.

“Coming into the end of the financial year you will see some people looking to make extra contributions and claim deductions for it,” Day said.

Continued on page 24

3/04/2019 3:12:09 PM

24 | Money Management April 11, 2019

Tax strategies

Continued from page 23 “The other issue there is you may have clients that have previously made personal contributions.

“To claim the tax deduction, they need to tell the trustee or lodge a notice of intention with the trustee to claim that deduction, and the clients must do that within certain time frames to be able to claim the deduction before 30 June.”

Last year, people could claim tax deductions for contributions they made prior, now if they haven’t lodged their tax return they have up until this financial year to lodge their notice of intention.

“Non-concessional contributions are after tax contributions,” Day said. “This might be money sitting in a bank account or a windfall from an inheritance or sale of assets, but it’s extra money in your account that you’ve already paid tax on that you might want to add to your superannuation.”

There’s a $100,000 cap on those per year, but if you’re under 65 you can bring forward two years’ of contributions to the current year.

Dawn Thomas, executive relationship manager and senior financial advisor for WealthWise and 2018 Money Management Women in Financial Services Awards finalist, said the lump sum contribution allows greater flexibility because clients might not have been salary sacrificing during the year.

“Someone might have decided to put money in their offset account, for example their mortgage, all year then decide in June they want to put a lump sum into their superannuation,” Thomas said.

Thomas said spousal contributions is another overlooked

05MM1104_16-34.indd 24

factor, now more important than ever, because of the $1.6 million limit on pension caps.

“If you’re not making use of both partners pension caps you’re going to lose out and that’s something that’s progressive,” Thomas said.

“People need to start splitting it now, because it’s going to be difficult to try and get lump sums in just as you retire.”

General apathy towards superannuation and its potential can hold back people from all backgrounds of wealth, however, posing an issue when dealing with clients who may not be interested in fulfilling their financial potential at tax time.

“They think it’s not their money, which creates that apathy and they think it’s money the government controls,” Thomas said.

“They don’t trust it or understand it, so they don’t engage with it and we’ve been

finding there’s quite a number of people who don’t open their super statement.

“So, there’s a lot of financial apathy when it comes to superannuation.”

WHERE WILL THE ATO BE LOOKING? Peter Bembrick, tax partner at HLB Mann Judd, said there’s a great deal of discussion about the Australian Tax Office (ATO) and where their focus area this year is.

“A year ago, they were focused on work related deductions and overclaiming on deductions,” Bembrick said. “Since they started focusing on that, they’ve seen a drop-off in that area, so it’s shown the ATO activity had some impact.”

Bembrick predicted this year’s focus will be on rental properties, specifically on what people will claim as deductions.

“There’s a feeling there’s been a

general over-claiming of deductions on rental properties,” Bembrick said. “Travel expenses is one mistake and that’s been addressed in a legislative way; people were claiming travel expenses to inspect the property and that was deemed unreasonable.”

A major item for newer properties is depreciation allowances.

“A lot of the new housing and developments, if they have a good quantity surveyor report, ensures they’re doing the right thing,” Bembrick said.

“But there’s a lot of deductions people can claim either as writeoffs for some of the actual building costs, particularly for newer developments, or just furniture, fixtures and fittings that can be depreciated over the life of the asset.

“Even furniture equipment, curtains, blinds and carpets are all perfectly fine.”

3/04/2019 3:12:28 PM

April 11, 2019 Money Management | 25

Tax strategies

The ATO publishes tables for how long these assets should last, which Bembrick recommends people should be mindful of to avoid the risk of overclaiming.

“Repairs is a common one: understanding what’s repaired, what’s really capital and what’s replacing something,” Bembrick said. “People will claim things that shouldn’t be claimed as repairs, they should be on depreciation or on the cost-base of the asset for capital gains tax purpose.”

Interest on loans is another issue if you’re claiming it on borrowed funds. Bembrick said the basic test is what was the money used for and if that purpose was relevant.

LET’S BE FRANK There’s been a lot of discussion about Labor’s proposed changes to franking dividend refunds. The suggested reforms effectively mean that when you’re receiving franked income, you’re always going to pay at least 30 per cent tax on it.

Currently, if your tax rate is lower than 30 per cent you get some of the balance back, which is tied with the proposal to ensure trust income is taxed at least at the same level.

“At the moment it’s possible to filter money through a trust to different beneficiaries, so that some of it might have a tax rate of lower than 30 per cent,” Bembrick said. “The basic strategy of Labor is to ensure that everyone is paying at least 30 per cent tax on that investment income.”

He notes however, that the dividend refunds shouldn’t be the main incentive to invest in certain stocks anyway.

“Our investment decisions shouldn’t be guided too much by

05MM1104_16-34.indd 25

“Don’t let the future changes hold you back from implementing any super strategies that you want to put into for this financial year and the next financial year.”

- Dawn Thomas, senior financial adviser, WealthWise tax at the end of the day, something has to be a good investment to make money out of it,” he says.

Labor has proposed to cease refunding excess imputation credits from 1 July 2017, with certain exemptions for people receiving a government pension or allowance, or for self-managed super funds (SMSFs) that had at least one member receiving a government pension or allowance on 27 March 2018.

Day said this will potentially impact both self-funded retirees, as well as self-managed super funds (SMSFs), and some larger funds.

“In response, some clients may seek to amend their asset allocation to reduce their exposure to Australian shares or implement strategies to try and qualify for a part pension or allowance,” Day said.

“However, depending on their circumstances many clients will need assistance to try and navigate these changes without exposing themselves to additional risk or reduced returns.”

ELECTION TIME With an impending Federal Election, there is some anxiety over what proposals might come into effect in the future.

Legislation around superannuation certainly affects

individual income tax positions and are up for negotiation for debate around every election and every federal budget as well.

The 10 per cent employment income test that used to disqualify employees from claiming deductions for their super contributions was removed from 1 July 2017, for example, meaning both employees and selfemployed people are eligible for this concession.

However, Day says it’s important to note that Labor are proposing to reinstate those rules if they win the next election, so the ability for employees to do this in the future may be limited.

Thomas said it’s best for stakeholders to be across the proposals for the different parties, but don’t let it prevent clients from making any superannuation contributions this year.

“That can happen with clients sometimes, they think because change is around the corner they’re not going to do anything at all,” Thomas said.

“With super legislation, change happens frequently so if you stopped every time there was going to be a change you would lose out.

“Don’t let the future changes hold you back from implementing any super strategies that you want to put into for this financial year and the next financial year.”

3/04/2019 3:12:41 PM

26 | Money Management April 11, 2019

Wealth management

HOW THE BANKS KEEP THE SWEETEST MORSELS

Two of the major banks may have exited their wealth businesses and two more may be on their way out, but Mike Taylor writes that they have astutely kept the sweetest morsels – their high net worth clients.

WHEN WESTPAC LATE last month announced that it was exiting its face-to-face financial advice business as part of a transaction with relatively little-known Melbourne-based firm, Viridian, one piece of financial information was critical to understanding its decision.

That information was contained at the very bottom of the bank’s announcement to the Australian Securities Exchange (ASX) and read as follows: “Exiting the Advice business and moving the Group’s wealth businesses into the Consumer and Business divisions will result in: • Removing the cash earnings loss from the Advice business

05MM1104_16-34.indd 26

($53 million in FY18 excluding remediation costs); and • $20 million (pre-tax) of productivity savings from operating one less business division.”

Broken down to its essence, this statement declared that Westpac was not only exiting a business heavily exposed to an increasingly costly regulatory burden, but that it was also drawing a line under acknowledged and potential losses.

Just as importantly for Westpac, while the likes of National Australia Bank (NAB) and the Commonwealth Bank continued to scour the market for buyers of their wealth businesses, Viridian Advisory had emerged to

enter into a transaction which would see it employ BT Financial Group’s salaried financial advisers and support staff.

Integral to the value of the transaction for Westpac was the reality that the bank was selling what it did not want and keeping what it valued most – its private wealth, platforms and investments and superannuation businesses.

In Viridian, it found a transaction partner of which a number of the shareholders were former Westpac or BT staffers, and a company with which it had maintained an ongoing commercial relationship.

This was something acknowledged at the time of the

transaction by Viridian chief executive, Glenn Calder, who said it represented an extension of an existing partnership and that he believed that Westpac could see the potential in the Viridian business.

“We’ve got a shared background and understand the business we are buying,” he said.

The sheer pragmatism of the move was highlighted at the time of the announcement by Westpac chief executive, Brian Hartzer, who said the company was “realigning our capabilities into the lines of business where it makes sense based on customer needs”.

“Most customers don’t differentiate between banking and wealth products; they want help

3/04/2019 2:55:55 PM

April 11, 2019 Money Management | 27

Wealth management

buying their home, paying their bills, planning for retirement, or protecting things that matter most to them. They expect professional service that meets their financial needs.”

“Moving Private Wealth into the Business division recognises that many of our high net worth customers have their own businesses or work for many of the companies we bank. Following our significant investment in Panorama and the launch of BT Open Services, we now have market leading platforms where the natural customer base is also primarily found in our Business division.

“Similarly, superannuation – including corporate superannuation, and support for SMSFs – is strongly linked to our Business division.”

Hartzer might have more bluntly stated: “In a post-Royal Commission world, Westpac is lowering its exposure to the comparatively highrisk world of planning and focusing on high net worth and leveraging its platform service capabilities”.

The Westpac CEO might also have noted that, not unlike ANZ’s wealth and insurance transactions with IOOF and Zurich, there were ongoing mutual referral benefits likely to maintain the flow of funds onto the bank’s platforms.

Those who have been watching the manner in which the Australia’s four major banks have been navigating their exit from financial planning will have detected a common approach – exiting conventional advice while retaining high net worth “private clients” When NAB last year confirmed

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its intention of exiting its wealth management business, excluding JB Were and nabtrade, it was a move designed to achieve almost exactly the same objectives as Westpac, but without a buyer having been found.

Importantly, NAB also announced in early February that nine months’ down the track from its initial announcement, it would be delaying its exit from the MLC. On the heels of announcing the exit of both its chief executive, Andrew Thorburn and chair, Ken Henry, the big banking group said that while the MLC wealth management business had achieved good momentum under new leadership it had been impacted by the fall-out from the Royal Commission. “…the current regulatory and operating environment for wealth businesses remains challenging and a delay of the intended public markets exit of MLC to FY20 is now likely,” the bank announced to the ASX. It said NAB retained the flexibility to consider trade sale options and would take a disciplined approach to the exit of MLC executing a transaction at the appropriate time.

Barely three weeks later the Commonwealth Bank announced a similar delay to its exit of the Colonial First State, Count Financial and Financial Wisdom businesses, together with Aussie Home Loans.

It said that it had suspended its demerger strategy for the businesses the focus on continuing client remediation and the recommendations from the

“From whatever front you look at it, we are reputationally significantly worse off and financially significantly worse off.”

- Gary Lennon, group chief financial officer, NAB Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

That means that while both the Commonwealth Bank and NAB remain intent on exiting substantial elements of their wealth management businesses the likelihood of them doing so before 2021 appears remote, with much depending on the prevailing political and regulatory environment in Australia and the state of the markets.

The challenges now confronting the Commonwealth Bank and NAB have served to underscore the good timing of ANZ in exiting core elements of its wealth and insurance businesses nearly two years’ ahead of its competitors.

While the sale of ANZ’s OnePath Pensions and Investments business remains somewhat problematic in the aftermath of the Royal Commission and legal action initiated against IOOF by the Australian Prudential Regulation Authority (APRA), the sale of advice businesses has largely been bedded down and the sale of its life insurance business to Zurich is all but complete.

Even though ANZ and Westpac have exited substantial elements of their wealth businesses, they have not been able to exit the responsibilities they have to their customers, particularly around the question of advice remediation.

Indeed, NAB’s interim chief executive and chairman-elect, Phil Chronican spelled out the reality confronting all the major banks – that remediation inevitably cost a good deal more than what was owed to a client.

Giving evidence before the House of Representatives Standing Committee on Economics inquiry into the four major banks, Chronican said: “It’s costly to remediate the customer because you’ve got to give them back the money you took and the cost of remediation itself is quite material”.

“So we end up paying, in some cases, twice as much to put customers back to where they should have been as we would have if we had done it properly,” he said.

NAB’s group chief financial officer, Gary Lennon said the cold reality for NAB had been remediation costs of $800 million over the last five years, “40 per cent is just dead cost go back and do the work to remediate customers”.

“So, we are definitely worse off on that 40 per cent out of that $800 million number. And then the compensation to customers includes interest as well, because we put the customer whole, including how they could have reinvested that number,” he said.

“From whatever front you look at it, we are reputationally significantly worse off and financially significantly worse off.”

4/04/2019 11:32:50 AM

28 | Money Management April 11, 2019

Retirement income

THE MOST IMPORTANT DIMENSION IN RETIREMENT: TIME By taking into account time considerations such as age at retirement and life expectancy, advisers can better equip their clients for retirement, Nathan Zahm writes.

DURING THEIR WORKING years, people leverage time to build savings, enjoy the benefits of compounding interest, and perhaps, if there is time, plan for far away things like retirement.

Then, upon reaching retirement, most individuals will be asking themselves many questions for the very first time.

Such as, how should I draw down my super balance, should I downsize my house, and how do I want to spend my newly found free time?

But “time” itself, may actually be the most important question as in, “how much time will I have to enjoy retirement?” As it turns out, the answer to this question impacts the answer to nearly every other question people might ask in retirement.

While governments, actuaries, and other institutions can rely on average life expectancy information and be fairly certain on the length of time in retirement for a group as a whole; for your clients, as individuals, the length of

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retirement is actually very uncertain. To help think through how time impacts your clients in retirement, we consider three key factors: 1) Age at retirement; 2) Life expectancy; and 3) Retirement goals.

The age at retirement is the variable that individuals likely control the most. While health and employment circumstances do impact retirement age, for individuals considering how best to ensure they have enough money to fund their retirement, delaying retirement is the best approach. Delaying actually has a dual benefit - one more year of saving and one less year of drawing on their super balance.

In fact, we can see many people are taking this approach today.

After dropping over a nearly 30-year period to about age 60, the retirement age has begun to increase since the late 1990s and is now between 64 and 66 (figure one). This is in part a reflection of the change in preservation age (the age retirees can access their super balance), but it is also a

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April 11, 2019 Money Management | 29

Retirement income Strap

reflection of people being in better health later in life and working longer both for life fulfillment and to meet savings needs.

For clients that have yet to retire, being very strategic about retirement timing, considering age pension eligibility, superannuation preservation age, health, and employment prospects will go a long way to ensuring the length of time in retirement is manageable.

If retirement age is the most controllable variable, then life expectancy is the greatest unknown variable and likely the one your clients will be thinking about most. Often cited statistics from the Australian Bureau of Statistics (ABS) note that life expectancy in Australia is 80.5 for men and 84.6 for women, but this is “at birth”. By the time Australians reach age

65 today, life expectancy is 84.7 for men and 87.3 for women; three to four years longer.

Planning for retirement to be even longer than life expectancy however likely makes sense. For example, for those retiring at 65, the age men and women are most likely to die at is actually 87 and 90 respectively (figure two). And for couples planning not only for one life span, but two, should plan for retirement to last past age 90. So a client entering retirement at 65 perhaps expecting an average a 15 to 20 year retirement, should more realistically expect a 20-25 year retirement.

This is of course just an “average” expectation, and again, as individuals, the risk of living beyond the average is high. In fact, over 25 per cent of men, over 40 per cent of women,

and nearly 60 per cent of couples (at least one person) will live past age 90 and experience a retirement well beyond 25 years in length if retiring at 65.

This gets to the final point about aligning retirement goals with the time horizon you’re planning for your client. While planning for a 30+ year retirement is highly prudent, it may leave a lot of money on the table for those that don’t live as long. For example, nearly half of men and over a third of women will experience a retirement of less than 20 years.

How do you strike the right balance of, on the one hand, ensuring there is money able to last a very long time while on the other hand, not sacrificing too much lifestyle spending today given retirement may not be as long as planned?

“Being very strategic about retirement timing, considering age pension eligibility, superannuation preservation age, health, and employment prospects will go a long way to ensuring the length of time in retirement is manageable.”

- Nathan Zahm, senior investment strategist, Vanguard.

Chart 1: Average age at retirement

Continued on page 30 Source: Vanguard, using OECD Average Effective Age at Retirement

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3/04/2019 3:25:20 PM

30 | Money Management April 11, 2019

Retirement income

Continued from page 29 In this case, aligning the objective to the time horizon is key, and helping clients understand the differences in basic living expenses versus discretionary, lifestyle expenses goes a long way.

We like to think of these outcomes in distributions and probabilities. For example, in the case of basic living expenses, we may be looking for a high degree of certainty, say 95+ per cent, that basic living expenses can be met for a 30+ year horizon through superannuation, age pension, and other assets. However, depending on a client’s circumstances, they may be more comfortable that lifestyle spending only has a 75 per cent probability of going beyond 20 years.

This information can then be used to establish appropriate spending policies and asset allocation given the resources available to your clients at retirement. As we can see in figure three, the amount of annual spending one can reasonably expect for a given portfolio value is highly dependent on the time horizon and desired probability of success. Understanding the objectives for that portfolio will help set the appropriate time horizon to use and risk level to take.

As investment professionals, we may often think of market volatility and returns as the most important dimension to manage for our clients, but time may be even more impactful, and is likely equally misunderstood.

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Helping your clients understand this risk, manage it, and plan for an appropriate amount of time given their goals in retirement, will go a long way in bringing them retirement success.

Nathan Zahm is a senior investment strategist at Vanguard Investment Strategy Group.

Chart 2: Age at death for workers retiring at 65

Source: Vanguard, using ABS Australia Life Table 2015 - 2017 Note: 2.8% of females, 1.4% of males, and 4.1% of couples survive to age 101 or later based on the current Australian Bureau of Statistics Life Table

Chart 3: Annual spending from a $500,000 super balance + age pension for given time horizon and probabilities of success

Source: Vanguard, December 2018 VCMM Simulation Note: The analysis assumed 0.5% annual investment fees, the retirees are homeowners and a balanced (50% equity/50% bond) portfolio. The model incorporates the age pension as at 31 December 2018 and only considers financial wealth.

3/04/2019 3:25:34 PM

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1/04/2019 4:47:41 PM

32 | Money Management April 11, 2019

Estate planning

ARE YOUR CLIENTS’ WILLS PROTECTED FROM FAMILY FEUDS? Anna Hacker outlines the significant risks that inexperienced Will executors can pose to clients’ estates.

ONE OF THE most important decisions in estate planning is choosing an executor, and yet often the choice is made without fully thinking through the implications. Most people tend to choose a family member or close friend, without considering whether they have the time, ability or even the interest in taking on the role.

But acting as executor is a hugely important role, that can profoundly affect the lives of those named in a Will, and it is important the right person is appointed to the job. Additionally, being an executor is often a time-consuming and complicated role. Deciding who

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will take on this responsibility when drafting an estate plan is extremely important.

This article outlines some useful tips to consider before choosing an executor.

TALK TO THEM BEFOREHAND This may sound obvious, but it’s a good idea to talk to the person you want to be executor, before nominating them in the estate plan. Nevertheless, it is always surprising how many people don’t let a nominated executor know in advance.

Being an executor is a huge responsibility, and some people

simply may not want to take this on. It’s far better to find this out before finalising an estate plan, so that a more appropriate executor can be selected.

Contrary to common thinking, someone cannot be forced to take on the role of executor, and the person listed in the Will may decide to renounce. If they do renounce the job they can elect to have, for example, a trustee company take over.

A common reason for executors seeking the assistance of a trustee company is that the trustee company is specialised in providing estate administration services and, even if the executor

chooses to continue acting as executor, some trustee companies offer solutions to assist them in their role.

One complication that can arise here though is the concept of “intermeddling”. This is when the chosen executor starts to act in the role – for instance, contacts banks or credit card companies in the role of executor – and then decides it is all too hard and chooses to renounce the role. If they have already started to act, then they are considered to have “intermeddled”. What’s more, they may be financially responsible for any losses or expenses that have occurred as a result of their

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April 11, 2019 Money Management | 33

Estate planning

decision to renounce.

This is even more reason to ensure prospective executors have been advised that they are named in the Will. It gives them the opportunity to consider whether they want to take on the position or not, rather than suddenly realise – in a state of grief – that they are listed as executor, and potentially intermeddle without understanding the implications.

Once people have started to take steps to manage the estate, it becomes extremely difficult for them to then renounce the role and, if they do not want to continue as executor, their only option is to apply to the Court to be removed.

CONSIDER WHETHER THE EXECUTOR WILL NEED TO BE REIMBURSED People often believe that a family member or friend who is appointed as an executor of a Will cannot, or is less likely to, charge a fee, and so conclude that this is a cost-effective option.

Increasingly, however, family members are likely to ask for a payment for acting as executor, particularly if there is conflict and the estate administration is complex.

If the estate is likely to end up paying someone to act as executor, it’s worth considering whether a friend or family member is still the most appropriate person or whether it’s better to go with a professional executor from the beginning. An independent executor will not “choose sides” in a conflict and will act in the best interests of the Will-maker.

CHOOSE AN EXECUTOR FOR THE RIGHT REASONS People sometimes decide to choose multiple children as executor, perhaps to avoid any concept of playing favourites, but

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fail to consider the fact that the children do not get on with each other or wider family conflicts.

This can cause all sorts of problems when it comes to estate administration. While many Willmakers are concerned about the expense of a professional executor, the reality is that there is often a cost saving overall as the estate can then be efficiently and effectively administered, without family conflict.

Furthermore, tensions from these conflicts can be significant and long-lasting and have a major impact on family relationships for many years to come. If Willmakers were truly aware of the impact, they are unlikely to want to put their loved ones through that conflict.

CONSIDER THE PROS AND CONS OF A PROFESSIONAL EXECUTOR As mentioned, people tend to think that choosing a friend or family member is a cost-effective way of handling an estate, while a professional executor such as a trustee company or lawyer will be expensive. But this can be a false economy.

Some considerations include: • If there is family conflict and the executor, is a family member or friend, the executor is less likely to take an objective view, particularly if the conflict arises as part of the estate administration process; • If the executor is the same age as the Will-maker they may pass away before the Willmaker leaving no executor at the time of the Will-maker’s death. Equally, it is possible that the executor may be too frail or too old to handle the role; • If the executor is elderly and there are ongoing testamentary trusts the trustee will have to be replaced and continuity may be an issue; • If the executor obtains probate

of the Will-maker’s Will and then dies shortly after, the executor of the executor’s estate will then usually be responsible for administering the original Will-maker’s estate. Not only is this an added burden for the second executor, but this may be a person the original will maker never knew; and • Finally, not all people appointed in an executorial role have the knowledge or ability to properly administer the estate. Being a faithful friend or a good child, doesn’t mean you should become an executor.

EXAMPLE OF HOW IT CAN ALL GO WRONG Barbara is a widow with three adult children – Helen, Mark and David – and five grandchildren.

She owns her home, worth $800,000, and has investments worth around $100,000.

She has created an estate plan that will establish a trust to leave all her assets to be divided equally amongst her grandchildren, and naming her eldest child, Helen, as her executor. There is no reason to have Helen as her executor, other than the fact she is the eldest.

Helen has no particular financial knowledge or background.

When Barbara dies, problems immediately arise. Helen takes responsibility for all arrangements for the funeral and then contacts the bank for payment of the funeral costs. She also advises all the utilities that she is executor and to forward any future invoices to her home address.

Also, Helen’s eldest child has just completed school and is taking a gap year to do some travel. Helen lets him know that she will advance some funds from the trust that will be set up, to help him buy a rail pass. However, when Mark’s eldest child wants

some money to book his ‘Schoolies’ trip later in the year, Helen says that she will refuse to authorise the funds.

However, Helen now realises the full range of responsibilities of being an executor and then later trustee of the grandchildren’s trusts, and decides she doesn’t want to take on the role.

Unfortunately, by contacting the bank for payment of funeral expenses and already purporting to be the executor to the utilities, Helen has intermeddled.

Further complicating matters, Mark is now very angry with Helen, both because she was named executor and not him, and because he found out that Helen is refusing to provide funds to his child but agreed to fund part of her son’s overseas trip. He insults Helen, causing a serious rift between the two siblings. Helen refuses to do anything further in the estate administration.

Now David is forced to get involved. He believes that if Helen isn’t executor, as chosen by their mother, then a professional trustee company should be appointed. He himself does not want to take on the burden of the role.

When he approaches Helen with the idea of appointing an independent executor, she is relieved. She was concerned that he would force her to continue acting as executor, even though she no longer wanted to undertake this role. They both consent to a trustee company applying and the estate was able to be professionally and efficiently administered. The siblings’ relationship was mended over time and the management of the on-going trusts for the grandchildren did not cause continued angst between them or the cousins.

Anna Hacker is national manager - estate planning at Australian Unity Trustees.

3/04/2019 3:10:44 PM

34 | Money Management April 11, 2019

Active ETFs

WHY ACTIVE ETFs CONTINUE TO SHINE When it comes to investing in an ETF, investors are often presented with a choice between active and passive investments. However, with a different version of the ETF now emerging – the Active ETF – Alva Devoy writes that it’s time to reframe this discussion with investors.

EXCHANGE TRADED FUNDS (ETFs) have been around for 25 years and as a product with the characteristics investors are often seeking – access to diversification and liquidity – they have been met with extraordinary demand. ETF holdings in Australia have grown by nearly one third in the last financial year alone and on-exchange investments overtook cash and property as the most popular choice for Australian investors in 2017.

Until the first Active ETFs were launched in 2015, the choice to invest in an ETF was a decision to invest in a passive investment solution, but this is no longer the case. Investors now have the choice to buy both active and passive strategies on exchange.

While more choice can only be a good thing, helping investors to understand the benefits and limitations of the different structures will be important in helping them to meet their investment objectives.

WHAT ARE ACTIVE ETFS? While traditional, passive ETFs track an index to provide investors with low-cost exposure to a

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particular asset class, country/ region or sector, Active ETFs, as the name suggests, are an actively managed portfolio of stocks constructed with the aim of outperforming the index which they are benchmarked against.

Like their passive counterparts, Active ETFs are quoted on the ASX and traded just like shares. Unlike regular managed funds, where an investor generally will not know the price per unit they have invested at until after the transaction, ETFs are traded at live market prices on an exchange. An iNAV price may be displayed by the respective fund manager (typically on the fund’s website) and updated throughout the day to provide an indication to investors what the underlying value of the ETF may be.

Each fund will have a different number of holdings depending on the investment approach and style.

The key is to ensure the fund is diversified. A well-diversified portfolio reduces risk (the variability of return) without sacrificing long term returns. The key to efficient, effective diversification is combining asset classes or securities that have low

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April 11, 2019 Money Management | 35

Active Strap ETFs

HOW THE NUMBERS STACK UP • 60 per cent of Australian’s now hold investments outside of super • DIY research is the most popular form of investment advice • 65 per cent of on-exchange investors traded using non-advice brokers and online trading platforms in the last 12 months • There are currently 179 ETFs quoted on the ASX.

correlations. Adding securities that are highly correlated with those already in the portfolio achieves little benefit and adds to costs.

WHAT ARE ITS ADVANTAGES? The benefits of investing in an Active ETF are many and varied, with the simplicity and ease of buying and no minimum investment amount obvious drawcards.

To begin investing, or to sell ETF holdings, it just takes one trade on the ASX. With every unit purchased, investors get exposure to multiple assets without the trading costs it would take for direct investment in each one.

By delivering exposure to a basket of individual assets within a class, sector or region, ETFs can offer the diversification that can be effective in smoothing out returns and spreading risk. By choosing

asset classes that are lowly correlated, if one or two investments are performing poorly, these can be offset by the returns you may receive on other investments within the portfolio.

Unlike regular managed funds, where an investor generally will not immediately know the price per unit they have invested at, ETFs are traded at live market prices on an exchange. This means an investors basket of holdings is available to view daily, giving investors timely visibility of their exposure to securities, markets, countries and sectors.

Some ETFs offer exposure to overseas markets, companies and asset classes that may be hard to access, research and monitor – such as emerging markets and industries.

For investors seeking to avoid concentration risk that can come from weighting a portfolio towards blue-chip Australian equities, for

HOW THE NUMBERS STACK UP 1993 ETFs began with the State Street Global Advisers SPDR fund which tracks the S&P 500 index 2000 Active ETFs start being traded in Germany 2001 First ETF to be launched in Australia by Salomon Smith Barney IndexShares 100 which tracks the S&P/ASX 100 2003 291 ETFs available globally 2013 ETF capitalisation hits US$2.3 billion globally 2015 First Active ETF launched in Australia 2018 ETF global FUM more than doubles in 5 years to reach US$5 billion 2018 Annual growth in ETFs in Australia in the year to June 2018 is 32.8 per cent

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example, trading global ETFs on the ASX can provide an easy, low-cost way to gain exposure to equities in other regions and sectors.

This is important because of the concentration of risk that currently exists in many investors’ portfolios. For example, a common example might be an investor who owns their own house, has investment properties and may also own shares (invariably bank shares because of the excellent dividends that Australian banks have delivered).

While they may think they have diversified their assets from property through to stocks and possibly funds, their exposure is still to Australian housing. That represents a risk. In making it easier to invest, Active ETFs are another way to help investors diversify their holdings and reduce this risk.

TRADITIONAL OR ACTIVE ETF? While the debate over active vs passive continues to rage in Australia, in reality active plus passive can be a great combination.

At different points in the investment cycle, such as during increased volatility, a higher allocation to active may be more appropriate, while when all markets have fallen precipitously, a higher allocation to passive should achieve good returns for a lower cost.

When it comes to the benefits of passive investing, the period post the global financial crisis in

2008 is a good case in point. While the stock market had taken a hit, the Australian economy was largely untouched and market falls were largely sentiment based. Investing in a passive fund at this point would have been rewarding for an investor.

On the other hand, active management offers the opportunity to achieve excess returns over the index but very importantly can offer a degree of downside protection which is particularly important if the aim is to provide investors with a smoother ride during periods of volatility.

Investors can decide which strategies suit their objectives best, be they active or passive, and combine these options easily to help them achieve the outcomes they are seeking, whether than be low cost access to markets, to outperform the index or to defend their portfolio against downside risk in periods of volatility.

With an increasing number of Active ETFs now available from a range of providers, buying an actively managed fund has never been easier. As Australian investors increasingly understand the benefits of this vehicle, especially in enhancing diversification of investments and also in providing risk adjusted returns, their popularity can only grow.

Alva Devoy is managing director of Fidelity International.

3/04/2019 3:11:29 PM

36 | Money Management April 11, 2019

Toolbox

GOING SMALL CAN REAP BIG REWARDS Bryan Ashenden lays out who should be taking advantage of the Government’s downsizer strategy and why, and how advisers can help them do so.

WITH THE 2019 Federal Budget leaving superannuation largely untouched (at least in comparison to prior years), it is worth remembering other opportunities that currently exist to give clients a boost to their super.

Indeed, the changes announced in this year’s Budget aren’t due to take effect until 1 July 2020, will be reliant on the Coalition being returned to Government and ultimately the successful passage of legislation to give effect to the announcements.

Perhaps the biggest opportunity that has arisen in recent years was announced in the 2017 Budget and

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took effect from 1 July 2018. If the level of interest from advisers on this opportunity is any gauge, then its potential for application for clients will be significant.

This new initiative, commonly referred to as ‘the downsizer strategy’, was announced by the Government as part of a range of measures in the 2017 Budget to help in opening up the ability for more people to buy a home – in this case by offering some encouragement to those aged 65 and above typically considering selling their property and moving somewhere smaller (hence the term downsizer).

More importantly though, the downsizer strategy is opening up opportunities for clients to top up (or in some cases even commence) their super, and has fast gained traction as one of the most topical strategies seen this financial year.

With average superannuation balances at the time of retirement ($270,710 for men and $157,050 for women) still below the Association of Superannuation Funds of Australia’s (ASFA’s) $640,000 projection for a comfortable retirement for a couple, an opportunity for clients to top up their super is an important consideration, particularly for

those approaching retirement.

The downsizer strategy, which took effect from 1 July 2018, means clients now have more opportunity to upsize their retirement nest egg.

WHICH CLIENTS WOULD BE INTERESTED IN THIS STRATEGY? To utilise the downsizer strategy, your client needs to be at least 65 years of age. It remains to be seen if the Coalition announcement of extending the pre-age 65 contribution rules to become pre age 67 contribution rules will result in the qualification age for downsizer contributions also

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April 11, 2019 Money Management | 37

Toolbox

rising to age 67. If that is the case, then there is a window of opportunity over the next year and bit for those currently aged (or approaching age) 65 to consider if there is an opportunity now to implement the downsizer strategy.

Despite existing opportunities for super top ups between ages 65 and 74 pending some paid work (or the one-off top up opportunity announced in the 2018 Federal Budget with no work requirement), or waiting for the proposed 2019 Budget announcements (regarding extending the current pre age 65 contribution rules to become pre age 67 contribution rules) to become law from 1 July 2020, these options don’t suit everyone.

And it also doesn’t consider the challenges involved in finding a suitable job from someone aged at least 65.

The benefit of the downsizer strategy is that there is no requirement to meet a work test for this contribution. This makes it ideal for clients who are currently aged between 65 and 74. But it is even more appealing for clients aged at least 75 who may still wish to contribute to their super– whether they are still working or not. Remember that the ability to voluntarily contribute to super largely disappears in all respects (both concessional and non-concessional contributions) from age 75.

Not only is this a great advantage of the downsizer strategy, but so is the fact that it doesn’t matter how much a client already has in super. The total

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superannuation balance threshold of $1.6 million that would normally prevent the ability to make further non-concessional contributions to super doesn’t apply for downsizer contributions.

If your client qualifies as a ‘downsizer’ they can make an additional contribution of up to $300,000 into super. It’s an after tax contribution so no tax is paid on the way in, and because they are over 65, it is returned tax free when they seek to withdraw these funds in the future. And if your client is eligible to make other contributions to super, they can still do this.

The opportunities for couples is even greater. If your client’s spouse also qualifies (based on age), then they can contribute $300,000 each – so $600,000 in total – even if only one member of the couple owned the property. The fact that the ownership of the property can be owned by one of the members of the couple is important, as strategies previously implemented for valid estate planning or asset protection outcomes won’t need to be unwound just to access the downsizer strategy.

WHICH CLIENTS ARE ELIGIBLE? In addition to the current age 65 threshold, there are a number of other important criteria to be met.

First, a client must sell a property that is located in Australia.

Second, they must have owned the property for at least 10 years.

When first introduced, the timing of the contract for sale was important as the contract had to be entered into on or after 1 July 2018.

This was important as clients who entered the contract for sale pre-1 July 2018, but where settlement occurs after 30 June 2018, were not eligible for this new initiative.

Finally, the property needs to have been your client’s principal place of residence for at least some time during its ownership.

Technically the test is whether your client will be eligible for an exemption from capital gains tax (CGT) when it’s sold under the main residence exemption provisions. Where the client had purchased the property pre-CGT (and so no CGT issues arises at all), the test is whether they would have been eligible for an exemption under the main residence provisions if the property had been subject to the CGT provisions (i.e. assume a purchase date of 20 September 1985).

Provided some exemption is available under the main residence provisions, it doesn’t matter whether it’s a full exemption or a partial exemption. This distinction is important as the property being sold could be an investment property today, so long as it was the main residence in the past – which means your client doesn’t have to sell their current main residence. Similarly, if the property your client lives in today was initially an investment property, but they have subsequently moved into it and are now looking to sell, it can also qualify.

When the property is sold, the sale price is key. If the property sells for more than $600,000, for example, then your client could contribute up to $600,000 to super

(being $300,000 maximum for each member of a couple, if both eligible). If it’s sold for less than $600,000, it’s up to the client to decide how much to contribute to super, up to the maximum allowed per person. But you can only contribute to the maximum of the sale price.

SO HOW DOES THE DOWNSIZER STRATEGY WORK IN PRACTICE? It goes without saying that a client needs to be at least 65 and selling an eligible property. And whilst the sale price of the property will dictate how much can be contributed into super, the physical proceeds from the sale don’t have to be used to make the contribution.

Other monies can be used.

Perhaps the most important issue to be aware of is around the timing of the contribution to super under the downsizer strategy.

There is a time limit of 90 days from receiving the sale proceeds to putting the money into super. And like contributions made under small business CGT provisions, you need to notify the superannuation fund at the time of the contribution (or earlier) that the contribution is a downsizer contribution.

Any contributions made in error, for example made after the 90-day timeframe has elapsed, or made without the correct notification as a downsizer contribution to the super fund, could be regarded as non-concessional contributions and could possibly result in excess contribution considerations.

Continued on page 38

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38 | Money Management April 11, 2019

Toolbox

CPD QUIZ This activity has been pre-accredited by the Financial Planning Association for 0.25 CPD credit, which may be used by financial planners as supporting evidence of ongoing professional development.

Continued from page 37 Additionally, they could be regarded as having been made in circumstances where the client was not actually able to make that contribution (i.e. made by a person aged 65 or older who hasn’t met the relevant work test requirements).

On this point, it’s also important to remember that provisions that used to compel super funds to reject contributions made in excess of the annual limit have been repealed. Advice around the timing of the contribution and fulfilling all requirements is therefore critical.

Finally, the timing of the contribution can have important implications if the 90-day window for making the contribution straddles 30 June. For clients who have not yet reached a total super balance of $1.6 million and are considering making additional contributions over and above the downsizer contribution, timing is critical.

For example, consider a 66-year-old client (who meets the work test requirements) is selling an eligible property for $500,000. They currently have a super balance of $1.45 million. If they make a $300,000 downsizer contribution prior to 30 June, it will form part of their total super balance at year end (taking it to $1.75 million) and disqualifying them from making further non-concessional contributions the following financial year.

DOES THE DOWNSIZER CONTRIBUTION SUIT EVERYONE? Clearly, clients must be in a position where they are thinking about selling their home. For many, the attachment to their principal residence is an important factor which means the downsizer contribution is not an option, even if they qualify in all other respects.

If the client qualifies, or is hoping to qualify for the Age Pension, the impact needs to be considered. Whilst they own their current main residence, its value is excluded from the assets test. However if it is sold, and some of the proceeds added to their super, that value will then be assessed and may reduce their age pension benefits.

And finally, whilst this opportunity is referred to as the ‘downsizer’ strategy, it doesn’t mean that your clients need to look at moving to something smaller or cheaper to access the opportunity. As long as the client (and the property) meets all the relevant requirements, there is no need to move to something smaller or cheaper. If it involves the sale of a previous principal residence (that is now an investment property), there is no need to move at all.

For clients who are eligible for this opportunity, it should certainly be considered, even if they are looking for a new house to buy in the meantime. The contribution is not subject to tax as it enters the super fund, and given they have to be at least 65 in order to qualify, they can withdraw the money at any time.

Given many Australians have their savings invested in their home, this opportunity to upsize super may offer a welcome relief. The extent of how widely this is used is still to be seen, as eligible contributions are only now making their way into the super system. But like all things with super and finance in general, getting it right is important and clients should be seeking professional guidance.

Bryan Ashenden is the head of financial literacy and advocacy at BT Financial Group.

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1. Based on existing rules, which of the following is not a requirement to access the downsizer contribution? a) You need to sell a property for which a main residence CGT exemption is available b) The property needs to be located in Australia and owned for at least 10 years c) You must contribute the relevant of proceeds of sale into super within 90 days of receipt d) You must be at least age 67 at the time of the contribution.

2. In 2001, Geoff and June purchased an investment property for $350,000. For asset protection purposes, the property was purchased in Geoff’s name only. In 2011, Geoff and June moved into that property and it became their main residence. Its value at that time was $500,000. In 2019, the property was sold for $700,000. How much can Geoff (currently aged 66) and June (currently aged 64) contribute between them into super under the downsizer opportunity? a) $200,000 b) $300,000 c) $350,000 d) $600,000 3. Where a person makes a downsizer contribution to super and fails to complete the relevant notification to the super fund, which of the following consequences may arise? a) The contribution may be regarded as a non-concessional contribution and assessed to the non-concessional cap b) The contribution may be considered to have been made in breach of the contribution rules c) The contribution may not be rejected by the receiving superfund d) All of the above 4. Which of the following is not an impact to be consider when employing a downsizing contribution? a) The amount of the client’s non-concessional cap still available in the current year b) The space available to the client under the total super balance rules c) The client’s desire to sell a property d) The potential impact on any Centrelink benefits 5. A property owned by a client that was their main residence 10 years ago, but has since been an investment property, will be eligible for accessing the downsizer contribution when sold (assuming all other requirements are met. a) True b) False

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ going-small-can-reap-big-rewards For more information about the CPD Quiz, please email education@moneymanagement.com.au

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April 11, 2019 Money Management | 39

Send your appointments to chris.dastoor@moneymanagement.com.au

Appointments

Move of the WEEK Dave Brownett Distribution manager, VIC and WA Centuria Capital

Centuria Capital Group announced the appointment of Dave Brownett, a financial services and product distribution specialist, to the role of distribution manager for Victoria and Western Australia.

He would be in charge of Centuria’s range of unlisted property trusts, including

AMP Capital announced the appointment of Rebecca Smith as its new head of real estate debt, Australia, a newly established role aiming to strengthen its real estate debt position across the region.

Smith, who would be reporting to global head of real estate, Carmel Hourigan, would also join the firm’s real estate leadership team, commencing in early April.

She joined from Australia’s sovereign wealth fund, the Future Fund, where she held the role of director of property and prior to that she worked at PAG, NM Rothschild & Sons, Allco Finance Group and CBRE across the US, Europe and Australia.

Emerging markets manager, RWC Partners, announced it entered the Australian market via its partnership with Channel Capital and

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investment bonds product Centuria LifeGoals, and be responsible for increasing investment by building relationships with financial advisers.

Jason Huljich, head of real estate and funds management for Centuria, said that Brownett had more than 15 years of experience across the distribu-

tion of financial services across a range of bank-aligned, independent and corporate dealer groups.

The announcement followed earlier appointments, Ben Harrop, Kylie Scrivener and Julia Desimone aimed at boosting Centuria’s distribution capabilities.

received a ‘recommended’ rating from Zenith for its CC RWC Global Emerging Markets Fund.

The strategy, which was managed by John Malloy and Thomas Allraum, returned 14.43 per cent per annum (after fees) since inception and was praised by the research house for its investment team and “viewing its depth and experience positively, as well as viewing its solid long-term track record positively, under the current investment process”.

The fund invested in emerging markets and could hold up to 20 per cent allocation to frontier markets whilst also providing daily liquidity.

Channel Investment Management is the responsible entity (RE) of the fund, with Channel Capital to be providing investment operations, client services

and distribution and marketing for the fund.

Self-managed super fund (SMSF) solutions provider, Heffron SMSF Solutions, announced that Meg Heffron, head of product, would replace Martin Heffron, who would move to a strategy and policy role, as managing director.

According to the Heffron board’s chair, Richard Cawsey, this move and Martin’s focus on SMSF advocacy while being involved in the business as a director would help the company expand its industry influence.

In her new role, Meg, who was currently the key point of knowledge for SMSF trustees and advisers, would drive Heffron both tactically and strategically.

The announcement followed a string of senior appointments at Heffron, including Natalie Sillar

as head of sales and marketing, Kylie Turner as chief financial officer and Alex Denham as a senior SMSF specialist in the education team.

Melbourne-based Jamieson Coote Bonds announced the expansion of its team with the new appointment of Ben Wang who would join as a portfolio manager in the firm’s Singapore office.

In his new role, he would be responsible for providing portfolio management support, research and analysis for the firm’s domestic and global high-grade bond strategies.

Wang joined from Wah Hun, a Singapore-based family office, where he served as vice president, investments. Prior to that, for three years he worked as a performance analyst at Aberdeen Asset Management.

3/04/2019 4:32:23 PM

OUTSIDER

ManagementApril April11, 2, 2015 40 | Money Management 2019

A light-hearted look at the other side of making money

Rich’s generous walk down memory lane OUTSIDER thought he might be being “April fooled” when, on 1 April, he noted the colourful Graham Rich celebrating Morningstar’s 20th birthday in Australia.

And then he realised that the ever-wily Rich was noting the day in 1999 on which Morningstar Australia became the new name for his business, FPG Research, which he founded in 1983.

There has been a lot of water under the bridge since 1 April, 1999, when Rich notes that he sold 49 per cent of FPG to Morningstar and if Outsider remembers rightly a fair bit of time spent in the courts before Rich and Morningstar settled their

legal battle after he was ousted in 2001.

It took until September, 2007 and the exchange of some money, for Rich and Morningstar to bury the legal hatchet, and Outsider admires the manner in which Sydney’s most ardent kiwi found the time last week to acknowledge the rise and rise of the business even after he left.

But, then again, following the legal settlement and the success of Rich’s Portfolio Construction Forum and his Continuing Professional Development push he can probably afford to be generous.

History is written by the victors and the vindicated.

Crimes, fees and the relevance of basis points OUTSIDER was reading a statement from the president of the Law Council, Arthur Moses SC, when he suddenly started thinking about financial advisers and asset-based fees.

Why? You ask. Because Mr Moses was referring to suggestions that social media companies which improperly allow the livestreaming of hate content such as the recent Christchurch mosque massacre should be penalised according to their annual turnover.

That’s why!

Moses warned that any penalty imposed by reference to their global annual turnover would be potentially unconstitutional.

“Irrespective of this, imposing penalties on companies by reference to their annual turnover rather than by reference to a maximum set of penalties is problematic. It will lead to difficulties with sentencing and mean companies will be punished by reference to their size rather than the seriousness of their breach,” he said. “That is bad for certainty and bad for business.

Such an approach to penalties, if used as a precedent for other areas of government regulation, could have a chilling effect on businesses investing in Australia or providing their services in this country.”

All of which brought Outsider back to the question of financial advisers and the charging of asset-based fees – a practice where there is consent and no discernible victim.

Has Pacman been closed down?

OUTSIDER wishes his old mate, former IOOF managing director, Chris Kelaher, a comfortable retirement/change of outlook following the company’s announcement that both he and IOOF chairman, George Venardos would be departing the company.

Few would have been surprised about the IOOF announcement given the view of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and the ongoing legal action being pursued by the Australian Prudential Regulation Authority (APRA).

Kelaher and Venardos were among those who

OUT OF CONTEXT www.moneymanagement.com.au

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stood aside after APRA initiated its action.

As Kelaher himself acknowledged, it was time for IOOF to move on under new leadership.

But the question people should be asking is whether given Kelaher’s industry nickname of “Pacman”, will IOOF continue to be as acquisitive in the future as it has been in the past, especially with so many bank wealth assets still on the market?

Outsider is prepared to bet that Kelaher has his views on wealth acquisitions but will more likely be working on his golf handicap and his skiing and apres skiing technique in the near term.

"It is extraordinary that I am up here today saying something as basic as 'obey the law'."

- ASIC chairman, James Shipton criticises the banks' attempt to undermine the corporate watchdog.

"Will it be regarded as akin to getting home at 11pm on Valentine's Day with a bunch of flowers from the servo?"

- Phillip Coorey, political editor at the Australian Financial Review, on the Federal Budget.

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4/04/2019 2:21:47 PM